# FIN 3410 Lecture Notes - Lecture 13: Arbitrage

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EX CH15 5
Background
Currency carry trade
A Bermuda-based hedge fund manager
I\$ = 6%
IY = 2.8%
The fund manager borrowed Y 1 billion for one year and invested in the US
So = Y95/\$
S1 = Y105/\$
Problem
Profit(\$) = revenue(\$) cost(\$)
o Revenue(\$) = FV(\$investment)
o Cost(\$) = \$equivalent of Y(loan+int)
1. Revenue(\$) = FV (\$ investment)
a. = [loanY / So(Y/\$)] * (1 + i\$)
b. = [Y1 billion / (Y95/\$)] * (1 + 0.06)
c. = \$11,157,895
2. Cost(\$) = \$equivalent of Y(loan+int)
a. = Y(loan+int) / S1(Y/\$)
b. = [Y1 billion * (1 + 0.028)] / (Y105/\$)
c. = \$9,790,476
3. Profit(\$) = revenue(\$) cost(\$)
a. = \$11,157,895 - \$9,790,476
b. = \$1,367,419
i. A loss is okay
EX CH15 4
Background
Io\$ = \$10,000,000 initial investment in pure-discount bonds
So = Y 80/\$
I1\$ = \$10,650,000
S1 = Y 110/\$
rY = ?
S1 > So
o \$ appreciation against Y
Approach 1
I1Y = I1\$ * S1(Y/\$)
o \$10,650,000 * Y 110/\$ = Y 1,171,500,000
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