Question

1. Triangular Arbitrage:

Ignore the bid ask spread and suppose that you are given the following currency quotes for three markets (C$ is the symbol for the Canadian $).

-    Toronto: S($/C$ )= $0.80

• Hamburg: S($/€ ) = $1.28
• Vancouver: S(€/C$) = €0.58

a. Use the exchange rates from Toronto and Hamburg to calculate the

     implied euro price of the Canadian $.

2. An arbitrage opportunity does exist. Suppose you start with

$1,000,000. Show exactly how much profit you would make by

exploiting the arbitrage opportunity. Please carefully show any work.

Answer 1

Answer--A

In this we need to calculate the exchange rate, or Euro price of the Canadian Dollar between Toronto and Hamburg. That is,

Answer--B

In this case we first buy Canadian $ for Dollar from Toronto

Second we will buy Euro for Canadian Dollar from Vancouver

Then we will buy Dollar for Euro from Toronto,

In this case we have loss for the arbitrage.