Find the no arbitrage range of future prices for a 1-month dollar future for Neithal & Co. with the following possibility: Borrow dollar, buy rupee. Invest in rupees and sell rupees in future. Neithal & Co. conce

CS Professional · Capital Commodity and Money Market · PYQS · June 2016
Find the no arbitrage range of future prices for a 1-month dollar future for Neithal & Co. with the following possibility: Borrow dollar, buy rupee. Invest in rupees and sell rupees in future. Neithal & Co. concentrates in forex market. Data are as under : 1-month treasury bill (US): 2.50% - 2.55% p.a. 1-month treasury bill (India): 6.75% - 6.80 % p.a. The dollar spot rate in India is ₹48.4050 / ₹48.4550 per US $.

Answer & Explanation:

For Neithal & Co. Borrow dollar, buy rupee. Invest in rupees and sell rupees in future. Borrow Amount ₹48.4050 Add: Interest (₹48.4050 * 0.0675 * 1 month) 0.2723 Total ₹48.6773 Sell in future market = ₹48.6773 / Future Where Future = (1 + (0.0255 * 1/12)) Future = 1 + 0.002125 = 1.002125 For No Arbitrage conditions of Neithal & Co. = ₹48.6773 / 1.002125 = ₹48.5741

Topics: Financial Markets

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