Question

You can buy and sell currency at the following exchange rates:

USD 0.047MXN,MXN 17.25CAD,USD 0.79CAD

1A. Is there an arbitrage in these exchange rates? Please provide evidence for your answer.

1B. If you start out with USD 100,000, what trades would you make to take advantage of any arbitrage you find? How many USD would you end up with?

Answer 1

Yes arbitrage possible

Profit = $2626.5

End up with $102626.5

Note : The actual $ Per MXN rate is $.047/MXN

But to prevent arbitrage it should be $.0457/MXN

It means MXN is overpriced i.e Dollar$ is underpriced ( we buy when something is underpriced)

This is the reason we start start selling $ in quote 3 and in step 3 we buy $ which is underpriced.