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interest rate

US 5%
Greece 10%
dollar per euro
Forward (one year) 2
Spot rate 1.5

Interest exchange rate 0.50

Amount in dollars 1000


Interest US 50
Amount in euro 667
Interest Greece 67

total payable 1050

total receipt in euro 733

amount in dollars 1467


a
Surplus (arbitrage) 417
Amount Surplus
1000 417
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000

Arbitrage
450
400
350
300
250
200
150
100
50
0
0 2000 4000 6000 8000 10000 12000
This is due to the fact that with the increase in amount there is an increase in the
surplus offered by arbitrage. This is due to two reasons. The first is that the
exchange rate has increased and the second is due to increased euro interest rate.

A riskless profit is earned if the currency is borrowed in US and loan is given in


Greece. It can be seen that the potential can be increased in terms of arbitrage
surplus. Another point is that the forward rate is utilized and it can also be accepted
that the fact is justified and It can be concluded this way there is no potential of loss
in this distribution

c
i

The difference between interest and principal in dollars and the proportional
exchange rate increase with respect to the interest rate with the dollar amount is
the net surplus in terms of market expectations.

Personal expectation is the simple phenomena pf getting more interest in return for
less dollar value. It can also be seen that the potential argument of the market is
much more objective than the personal expectation. It can also be seen that the
direction is positive and in return the surplus is also risk free.

ii

if the currency Euro had a bump due to Greece. It was observed that the potential of
this limit was subsided and first impact it suffered was based on international
transactions. As every other nation started to pull its reserves out of Greece. It was
definitely the wise move to move cash out of Greece, in terms of the first
opportunity.

Q2d
i
_=_+_ _(+1)^,
0<<1

ii
Long run equilibrium would hold and it would signify that the potential
reconnaissance is far more astounding than that of the short run

Q2e
i
this indicates the banker's percentage and its impact on the potential surplus of the
society. It can also be observed that the direction of the surplus depends upon this
percentage.
ii

_=(__)/(_(+1)^ ),
0<<1

iii
This fee is charged due to the fact that the potential weakness of the organization is
unidirectional and in order for the bank to trade it is obligatory for the organization
to cover the inter-currency exchange rate risk.