Sam Missan, Andrew Dukes, Brian MincherProfessor JaworskiFIN 435- International Finance10/10/12Problem 1Given the following banks are offering the following Bid and Ask on the US $/Mexican Peso.($/MXP) BID ASKBank A 0.75 0.78Bank B 0.73 0.75 1.33 (MXP/$)Bank C 0.77 0.79 1.30 (MXP/$)Bank D 0.76 0.79Bank E 0.75 0.77#1 Decide if any arbitrage opportunities exist. If there is/ are arbitrage opportunity(s), please describe them.Buy from Bank B at 0.75 ($/MXP)Sell to Bank C at 0.77 ($/MXP)Profit = 0.02 ($/MXP)An arbitrage opportunity does exist in this situation. The largest mispricing is between Bank B’s ask price and Bank C’s bid price. The idea is to buy cheap, and sell high. Bank B’s ask price is undervalued, and Bank C’s bid price is overvalued.#2 You are given $1 million to take advantage of any arbitrage opportunity in the mispricing of the US $ and the Mexican Peso. Your goal is to make the most money possible. Being extremely specific describe, step-by-step, what arbitrage trade you would engage in to achieve your goal. Show your calculations.GIVEN: Start with a certain amount of US Dollars = $1,000,000At Bank B Sell Dollars $1,000,000Buy (get) MXP 1,333,333 at 0.75 ($/MXP)At Bank C Sell MXP 1,333,333 at 0.77 ($/MXP)Buy (get) Dollars $1,026,666Profit $26,666#3 How much profit would you make?In this situation, you would make a profit of $26,666. #4 Describe in painstaking detail how the market will return to equilibrium. A. The increasingly high demand for US $ will strengthen/appreciate the value of the dollar causing the Asking price for Bank B to increase. With the supply and demand forces in effect the .75 asking price and .79 asking price will adjust back to equilibrium because the increasing demand in the supply of the first one will cause the second one to depreciate and go to a less inflationary price around .77 (equilibrium).Problem 2Last quarter Canada gathered the following economic data (in Canadian dollars) related to the listed transaction/items :Canadian export products CAD 2.3BCanadian export of services CAD 1.0BImport of products into Canada CAD 1.8BService provided by foreign based companies to Canada CAD 1.1BRepatriation of CAD from foreign subsidiaries of Canadian companies back into Canada CAD 700MForeign investment in Canadian financial assets CAD 1.0BCanadian investment in foreign assets CAD 1.5BForeign investment in Canadian real estate CAD 1.1B#1 Break down Canada’s Balance of Payment account into Current Account and Capital Account. Quantify each account, detailing which items (listed above) belong in each account, whether each transaction/item is considered a credit or debit to the BOP.Current Account ItemsFlow of Funds (CAD)Export Products 2,300,000,000Export Services 1,000,000,000Import of Products -1,800,000,000Foreign Service Provided -1,100,000,000Repatriation 700,000,000Current Account Total 1,100,000,000Capital Account ItemsFlow of Funds (CAD)CAN Financial Assets 1,000,000,000CAN Foreign Assets -1,500,000,000CAN Real Estate 1,100,000,000Capital Account Total 600,000,000#2 Assume that Canada follows a floating rate currency regime. How much foreign reserves must Canada use to achieve its currency goals? In painstaking detail, describe how your answer allows Canada to achieve its currency goal.Due to the fact that Canada has a floating rate currency regime they do not need to peg their currency to a foreign currency. As you can see from the 2 charts above Canada has a surplus in both its Current Account and Capital Account. With this, you can infer that there is less CAD in circulation causing the value of the CAD to increase and in turn hiking up the prices of their products and services. Canada could import more items to reduce the surplus if it is significantly affecting the FX rate. Additionally, the prices will increase, causing a decrease in the demand whichwill attribute to getting the FX rate back to a better suited or equilibrium rate. #3 Leaving Canada behind, assume that any country records a deficit for its Balance of Payment. How would this deficit affect the country’s currency on the spot market? Explain/support your view in great detail.If a country records a deficit for its BOP the currency would directly be impacted on the currency spot market. The value of that currency would be down so essentially they would need to buy up their own currency off the market to decrease the supply and increase the demand. Moreover with an account deficit it would cause your currency to be valued low in comparison to other currencies and ideally people would start purchasing more of your products (increasing your inflow of capital) and then reduce the BOP deficit.Problem 3Given the following exchange rates calculate the Yen/US$ exchange rate.112.75 Yen/Euro 1.7960 NZD/Euro 0.01254 SFR/Yen9.5378 HKD/Euro 0.12831 US$/HKD 0.68140 US$/NZD1.7960 NZD/Euro * .6814 $/NZD= 1.2238 $/Euro1/1.2238 Euro/$ * 112.75 Yen/Euro= 92.13 Yen/$Problem 4The following banks are advertising the listed pair (two currency) exchange rates: Banco Santander (BS) 0.01085 US $/YenToronto Dominion (TD) 7.5047 Kroner/ CADBarclays Bank (BB) 92.1659Yen/ US$Lloyd’s Bank (LB) 8.8030 Kroner/US$Citicorp (CB) 8.8030 Kroner/US$Socgen (SB) 11.8070 Yen/Kroner#1 Describe the arbitrage opportunity that exists. Which bank is about to loss some money courtesy of your intimate knowledge of currency arbitrage? Which currency has the bank overvalued? Which currency has the bank undervalued? With this knowledge which currency do you ultimately want to sell/buy?The arbitrage opportunity that exists is that SB is overvaluing the value of the Yen/Kroner. So in order to make money off of the arbitrage I would like to purchase the US$ at the overvalued price at SB.#2 To make this a truly “riskless” arbitrage trade you will borrow $10 million to start the process. In the end you will pay the lender $2,500 to borrow the funds. Being extremely specific describe, step by step, how you would construct the trade.After recognizing the arbitrage opportunity your first step should be borrowing the funds, and your last step should be calculating your profit (taking into account what you paid the lender). Show your calculationsA. First you will borrow $10,000,000 and we purchase Kroner at CB at the rate of 8.8030 Kroner/US$. This leaves us with 88,030,000 Kroner. Next we sellthe