Outline the strategy and the profit from location arbitrage.



The following quotes for the Brazilian Real (US $ per Br. Real) are available in two different banks:



Bank X Bank Y


Bid $0.3120/Br. Real $0.3452/Br. Real


Ask $0.3230/Br. Real $0.3610/Br. Real


You have 1 million dollars. Outline the strategy and the profit from location arbitrage.
In this homework, you will find a lot of guided reading questions. That is because this section of the course, Module 3, is focused on providing students background information related to various markets, including Money Markets, Bonds, Mortgages, Stock Markets, Foreign Exchange and Derivatives markets. Do spend some time reading through Chapters 5, 6, 7, and 8 as they are a more important and significant component of this module. Chapters 9 and 10 (Derivatives and Foreign Exchange) will be covered just briefly to give a general overview. In all of the chapters focus on grasping an understanding of the instruments in each market and the participants in each market as that is what matters most.
Question 10, Chapter 10, Derivatives Markets, Guided Readings, pgs. 331 – 335 First read, Chapter 10, Derivatives markets, only the beginning part!, pages 331 to 335. Focus on learning what the instruments are, i.e. forwards, futures and options. This class will not focus or touch the mathematics of derivatives (Please see FIN 411: Derivatives, for that material.) Pick either options or futures/forwards and detail which one is more interesting to you and why.

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