Neftci Principles in financial engineering problem 2nd ed Ch3 Ex 3(c)

[elektor]

I need help in understanding the answer to a question in Neftci's Principles in Financial Engineering book 2nd Edition under Chapter 3 exercise 3(c).

The solution manual says that with the new outright forward spot rates consider the synthetics and to go long in one which gives higher profit while shorting the other to create an arbitrage portfolio.

I have the two sets of synthetics but these synthetics are already such that I am long in one and I am short the other. Now he says to go long in the one which gives a higher profit? Under what scenarios will I get a profit? Could someone help me with understanding the positions I should be taking with the outright forward rates where I would be getting profits?

Regards

 

[alain]

where did you get the solutions manual from? could you post a link?

 

[elektor]

Its available on elsevier.com http://textbooks.elsevier.com/manua.../9780123735744/solutions/solutions_manual.pdf

 

[elektor]

Basically the problem I have is with the statement "which gives a higher profit". Does he take two strategies in which one is evaluated to be having higher profits than the other? If yes then what is the second arbitrage strategy.

The first I evaluate as short Contract A with long 1.1525 EUR/USD forward and long Contract B with short 1.510 EUR/USD forward. Is this the only arbitrage strategy possible?