Question

In March 8th 2020, In London 1 $ = £ 0.7656, while in Zurich 1 SF = $1.08, but you found out that at JP Morgan, the cross rate between CHF and GBP is: 1 SF = £ 0.9264.

If you are a trader at Citibank, and you have USD 1,000,000 for an arbitrage.

- Is there any arbitrage profit that could be made with a triangular arbitrage action?
- Describe an example of how such a profit may be earned (draw
*a similar triangular diagram referring to lecture slides page 18*). Make sure to show your steps, and most importantly, the ending $ value. - What would you guess about the relationship between the dollar rates and cross-rates after arbitrageurs notice this profit opportunity?

Answer #1

GBP/USD | 0.7656 |

USD/CHF | 1.08 |

GBP/CHF | 0.826848 |

GBP/CHF | 0.9264 |

So it is clear that GBP is cheaper (or CHF more expensive) when bought using JP Morgan cross rate, as compared to the two step transaction (GBP/USD and USD/CHF) | |

Hence, we should first convert our USD into CHF in the open market, then use these CHF to buy GBP from JP Morgan, and finally use these GBP to get USD in the open market as follows: | |

Buy CHF | 925925.9 |

Buy GBP | 857777.8 |

Buy USD | 1120399 |

We end up with $1,120,399 using the arbitrage described above |

Assume there is a direct cross market for GBP/Sf. Assume the
spot FX rates with the USD are 1.5 Sf/$ and 1.50 $/£.
What should be the direct cross-rate be for Sf/£?
If the direct cross-rate is 2.50 Sf/£, what three deals can you
do to lock in a risk free profit on 1 unit of the base currency?
Calculate the arbitrage profit.

Assume that you are a trader with Barclays Bank in London. From
the screen on your terminal, you notice that HSBC Bank is quoting $
1.5150 / £ 1.00. Credit Suisse is quoting SF 1.4150 / $ 1.00. You
learn that UBS is making a direct market between Swiss franc and
British pound, with a current SF/ £ quote of 2.1625. Assume you
have $ 100,000 to conduct the arbitrage.
a) Is there an arbitrage opportunity?
Show the required calculations....

Assume you are a trader with Deutsche Bank. From the quote
screen on your computer terminal, you notice that Dresdner Bank is
quoting €0.855/$1.00 Credit Suisse is offering SF1.1825/$1.00.
UBS’s current direct quoting €/SF currently @ € 0.754/SF
i. Prove and explain whether at these quoted rates there a
chance for triangular arbitrage (Hint: Use the no arbitrage cross
exchange rate here).
ii. Show and explain how you can make a triangular arbitrage
profit by trading at these prices. (Ignore...

1)Citibank quotes USD1.8500/GBP, Barclays quotes EUR1.5000/GBP,
and Dresdner quotes USD1.2000/EUR. If you have USD 1,000,000 to
invest, find the triangular arbitrage profit.
2)Amanda Smyth is a foreign exchange dealer for a bank in Texas.
She has USD 1,000,000 for a short-term money market investment and
wonders if she should invest in U.S. dollars for six months or make
a covered interest arbitrage (CIA) investment in the Japanese yen.
If she makes the CIA investment, what is the total amount that...

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