Question

Answer these questions:

1. Identify and how to calculate arbitrage opportunity

2. Essential components of arbitrage

3. Basics of monetary policy

4. Basics of fiscal policy measures

Answer 1

1. Identify and how to calculate arbitrage opportunity

Arbitrage- Arbitrage is a process of buying assets from one market and selling the asset to another market and this is done to gain profit from the difference in the asset price between markets.

Let's take an example to identify and calculate the arbitrage opportunity.

Arbitrage Profit =   Principal * Identified Bid    _ Principal

Identified Ask

Assume Principal = 1 million i.e 10,00,000

Numerical

AUD/USD 1.9309 - 1.9388 ( Bank X)

AUD/USD 1.9398-1.9400 ( Bank Y)

Answer

Bid 1.9398 > Ask 1.9388

Because the Bid is greater than Ask arbitrage exists.

Assuming Capital AUD 1 million

Arbitrage profit by using the above formula =   Principal * Identified Bid    _ Principal

Identified Ask

Putting the valve in the above formula = 10,00,000* 1.9398   _ 10,00,000

1.9388

= AUD 515.78 per AUD 1 Million.

2. Essential components of arbitrage

1. Two markets and an identical asset.

2. The difference in the price of the asset.

3. Buying and selling simultaneously.

4. Risk-free profit.

3. Basics of monetary policy

Monetary Policy

Monetary policy can be termed as the action of the nation's central bank, to control the amount of money and credit in the nation's economy.

Basics a. To control inflation.

b. To turn down the unemployment.

c. Support long term interest rates.

4. Basics of fiscal policy measures

Fiscal policy

Fiscal policy is termed as a government action plan of spending and taxation policies intended to support economic stability.

Basics

a. Lowering or cutting down the tax.

b. Increasing the amount of government spending.

By the above two actions of the government through fiscal policy, the demand will increase and downturn the budget surplus.