Question

1. Suppose you had $21,000 to invest. The exchange rate between the euro and the U.S. dollar was $1.20 per euro, and the exchange rate between the Canadian dollar and the U.S. dollar was U.S. $1.05 per Canadian dollar. The exchange rate between the Canadian Dollar and the Euro is 1.10 Canadian Dollars to the Euro. Three-point arbitrage is the practice of taking your currency, buying a foreign currency then using that foreign currency to buy a second foreign currency the converting that second foreign currency back into your currency. Is there an opportunity to use your $21,000 to make a gain on three-point arbitrage using Euros and Canadian dollars? If so which currency do you buy with dollars and how much do you make on a transaction that, on-line, tales less than 5 minutes?

Answer 1

The way to make money from the arbitrage would be

1) Buy Canadian Dollars with $21000. Total Canadian Dollars received = $21000/1.05 = 20000 Canadian Dollars

2) Buy Euros with the Canadian Dollars. Total Euros received = 20000/1.1 Euro = 18181.82 Euros

3) Buy USD with Euros. Total USD Received = 18181.82 * 1.2 = $21818.18

So we started with $21000 and ended up having $21818.18 in 3 transactions.

So we buy Canadian Dollars with USD and we make $818.18 in the transaction of 1 Three-point arbitrage.

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