Question

Part 6. Arbitrage

1. If the dealers’ quotes for the Mexican peso are as indicated below, is there an arbitrage opportunity? If so, what trades must be made to take advantage of the arbitrage opportunity, how profitable is it, and what is this type of arbitrage called?

Dealer	USD/MXN quote
1	19.2899 - 19.2972
2	19.2860 - 19.2978
3	19.2962 - 19.3009
4	19.2900 - 19.3003
5	19.2944 - 19.3006
6	19.2942 - 19.2984
7	19.2948 - 19.3008
8	19.2905 - 19.2955
9	19.2953 - 19.3052
10	19.2922 - 19.2966

2. If the exchange rates in New York and Toronto are as indicated below, is there an arbitrage opportunity? If so, what trades must be made to take advantage of the opportunity, how profitable is it, and what is this type of arbitrage called?

New York quotes
USD/CAD	1.3300
GBP/USD	1.2680
Toronto quotes
GBP/CAD	1.6866

3. If the USD/JPY spot and 9-month forward exchange rates and the interest rates in the US and Japan are as indicated below, is there an arbitrage opportunity? If so, what trades must be made to take advantage of the opportunity, how profitable is it, and what is this type of arbitrage called?

USD/JPY exchange rates
spot rate	110.40
9-month forward rate	108.15
interest rates
Japan	0.049%
US	2.845%

Answer 1

Answer to Question No. 2 is as follows

Step 1 : Convert the New York Quotes into GBP/CAD

GBP/CAD = GBP/USD * USD/CAD

GBP/CAD = 1.2680 * 1.3300 = 1.68644

New York quotes for GBP/CAD = 1.68644

Toronto quotes for GBP/CAD = 1.6866

Profit of 0.0002 CAD per 1 GBP

This is called as Cross Border Arbitrage

For Question 3 Please refer to the Image uploaded