Devising a trading strategy to generate arbitrage profits.
You observe that the one-year forward price of a share of stock in Kramer Inc. a new York tour bus company and purveyor of fine clothing in 445 000, whereas the spot price of a share is $41000. If the risk less yield on a one year zero coupon government bond is 5%, what is the forward price implied by the law of one price? Can you devise a trading strategy to generate arbitrage profits? How much would you earn per share?
Cost structure and the marginal revenue line.
Acme, Inc., a U.S. multinational corporation, has a subsidiary in Mexico, which sells goods in the Mexican market that are produced entirely using U.S. dollar inputs. Because of local competition, the subsidiary is a price taker in Mexican pesos.
a. Show a diagram of the firm's cost structure and the marginal revenue line. In the diagram, show the initial level of profit from the Mexican operations. Briefly describe the amount of profit.
b. Now consider what happens if the Mexican peso depreciates by 15 percent. Show the effects of depreciation in the diagram. Specify the new level of profit from the Mexican operations. Describe the profit change in terms of the margin effect and the volume effect.