In: Accounting
Assume you are a Turkish investor who has the headquarter in Istanbul. Currently, you have not sufficient capital for investment. However, you intend to operate with 1.000.000 Turkish Lira (TL) that will be provided by a domestic bank. Given the information in Table 3 elaborate an arbitrage strategy to achieve some riskless profit. How much is your riskless profit from your strategy? Is it worth to undertake the strategy?
Table 3.
Spot Rate of 1 USD (S) |
3,900 |
Forward Rate of 1 USD (F) |
4,120 |
Interest rate on USD Deposits (r) |
0,089 |
Interest rate on TL Deposits (r) |
0,150 |
Borrow 1000000 Turkish Lira(TL) and buy USD.Invest these USD @8.9%.Convert the amount invested plus interest using forward rate.Repay the TL borrowing using the converted amount
.
Calculation of Arbitrage profit | ||
Spot rate of 1$ | 3900 | |
Forward rate of 1$ | 4120 | |
% of premium | (4120-3900)/3900 = 5.6410 | |
Borrow TL 1000000 @ 15% | TL 1000000 | |
Convert TL 1000000 to USD using spot rate | 1000000/3900 | 256.4103 |
Invest USD 256.4103 @ 8.9% | Interest | 22.82051 |
Total | 279.2308 | |
Sell USD using forward rate | 279.2308*4120 | |
1150430.769 | ||
Repay the borrowing with interest | ||
Borrowing 1000000 TL | ||
Add:Interest payable @ 15% 150000TL | ||
1150000 | 1150000 | |
Arbitrage gain in TL | 430.7692308 |
It is worth undertaking this strategy since the profit is 430.769