Please explain the concept of Arbitrage in FRA (forward rate agreement).
Please solve following Question:
3 month interest rate is = 8% p.a.
6 month interest rate is 10 %
3 X 6 FRA = 11%-12%
Is arbitrage is possible? please provide me the solution.
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Arbitrage in forward rate agreement.....???
Replies (3)
ARBITRAGE IS OF 2 TYPES
1. GEOGRAPHICAL
2.COVERED INTERST
IS YOUR PROB IS COMPLETE?
You are taking about Foreign exchange arbitrage and i am taking about Forward rate agreement arbitrage.
ARBITRAGE NOT POSSIBLE IN THIS CASE.... CALCULATE FAIR FRA AND COMAPARE WITH DEPOSIT FOR 6 MONTH @ 10%( SAME ACTION THAT IN DERIVATIVE OPTION ONLY DIFF FIRST CALCULATE FAIR FRA... REMEMBER BANK LEND AT HIGH RATE AND DEPOSIT AT LOW RATE WHILE CALCULATING FAIR FRA.. ALSO WHILE CHECKING DO CHECK BOTH OPTION OR SIMPLY GO WITH AMOUNT AND CHECK ( 2ND TECHNIQUE)
FOR MORE CLEARITY SUGGESTED MAY 2010 ( I AM UNABLE TO ATTACH SOLUTION,SOME PROBLEM WITH THAT WITHIN SITE , SORRY FOR THAT)
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