Question

What will happen if the following exchange rates (involving the Australian dollar, the New Zealand dollar...

What will happen if the following exchange rates (involving the Australian dollar, the New Zealand dollar and the Hong Kong dollar) are quoted in Sydney, Wellington and Hong Kong?(5) HKD/AUD 5.9809

NZD/AUD 1.1162

HKD/NZD 5.3860

Is there any arbitrage opportunity in the market? If yes, what is your net profit if you have 1 unit of domestic currency?

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Answer #1

Hi,

Hope you are doing well!

Question:

Answer:

Currencies quoted  in Sydney:

HKD/AUD 5.9809

NZD/AUD 1.1162

HKD/NZD 5.3860

Domestic currency is AUD

Arbitrage opportunity:

HKD/NZD 5.3860 * NZD/AUD 1.1162

HKD/AUD 6.0118

Here, HKD/AUD 6.0118 and HKD/AUD 5.9809 is no same so there is an arbitrage opportunity.

Net arbitrage Profit:

Step 1:

Sell AUD1 and buy NZD1.1162

Step 2:

Sell NZD1.1162 and buy HKD6.0118

Step 3:

Sell HKD6.0118 and buy AUD1.0051

Total  Arbitrage Profit = AUD1.0051 - AUD1 = AUD0.0051

Thank You

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