## Answers

Step 1 : | |||||||||||

Take loan in USD @ 1.50% | |||||||||||

For instance, if you take US$ 1,000,000 loan for two years, the amount to be returned after two years is as follows: | |||||||||||

Amount = Principal X (1 + Interest)^Period | |||||||||||

Amount = 1,000,000 X (1+0.0150)^2 | |||||||||||

=USD 1,030,225 | |||||||||||

Step 2 : | |||||||||||

Convert the US$ 1,000,000 into PLN (at 3 PLN/USD) | |||||||||||

=1,000,000 * 3 | |||||||||||

=3,000,000 | |||||||||||

Invest this amount for 2 years @ 3% | |||||||||||

After 2 years the amount to be received will be = 3,000,000 X (1+0.03)^2 | |||||||||||

=PLN 3,182,700 | |||||||||||

Also, at this point, the speculator will have to enter into a 2 years forward contract to convert USD at 3.05 PLN/USD | |||||||||||

| |||||||||||

Convert the amount of PLN 3,182,700 into USD at 3.05 PLN/ USD after two years | |||||||||||

= USD 1,043,508 (3,182,700 / 3.05) | |||||||||||

Step 4 : | |||||||||||

Return back the USD loan | |||||||||||

As per step 1, the amount to be returned is = USD 1,030,225 | |||||||||||

However, due to arbitrage, the speculator will have USD 1,043,508 | |||||||||||

Arbitrage gains will be USD 1,043,508 - USD 1,030,225 | |||||||||||

=USD 13283 per USD 1,000,000 | |||||||||||

Hence, to make arbitrage gains USD loan will have to be taken | |||||||||||

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