Question

The Malaysian Ringgit is quoted by Hani Bank in Kuala Lumpur at $0.3510 Bid and $0.3150 Ask. At the same time, Ori Bank in Singapore is quoting $0.3170/$.3180. Under this scenario: A. Describe the arbitrage opportunity available to investors?

B. What would be the profit if an investor had $1 Million to invest, ignoring trading costs?

Answer 1

Hani bank rate = $0.3510-$3150
Bid rate for $ = 1/Ask rate = 1/0.3150 = 3.1746
Ask rate for $ = 1/Bid rate = 1/0.3510 = 2.849
Hani bank rate for $ = 3.1746-2.8490
Ori Bank rate = $0.3170-$0.3180
Bid rate for $ = 1/Ask rate = 1/0.3180 = 3.1447
Ask rate for $ = 1/Bid rate = 1/0.3170 = 3.1546
Ori bank rate for $ = 3.1447-3.1546
If we have $1000000, we can convert into Malaysian ringets from
Hani bank = $1000000*3.1746 = 3174600 Malaysian ringets.
Sell these ringets and convert to $ from Hani bank i.e 3174600*0.3510 = $1114284.6
Net profit = $1114284.6-$1000000 = $114284.6