Question

S (€ / £) = S ($ / £) / S ( $ / €) Suppose...

S (€ / £) = S ($ / £) / S ( $ / €)

Suppose

  • Citibank’s quote: $1.5445 – 1.5460 / €
  • Barclay’s quote: $1.9443 – 1.9453 / £
  • Dresdner’s quote: €1.2789 – 1.2799 / £

  • Cross-rate between Citibank and Barclay should be € 1.2589 / ₤, compared to the actual Dresdner quote of €1.2789 / ₤.  

Is triangular arbitrage possible if an investor starts with € 1 million and follows the following two strategies independently?

  • (a) Euros to Dollars to Pounds to Euros.
  • (b) Euros to Pounds to Dollars to Euros.

Are there are arbitrage gains or losses in either case? If yes, how much?

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