Question

# The following exchange rates are available to you. (You can buy or sell at the stated...

The following exchange rates are available to you. (You can buy or sell at the stated rates.)

 SGD/USD 1.65 USD/CHY 0.16 SGD/CHY 0.3

Assume you have an initial USD 12,000.  Can you make a profit via triangular arbitrage?  If so, show the steps and calculate the amount of profit in USD.

Solution-

Initial USD= \$12000

1 USD= SGD 1.65

1 CHY= USD 0.16

1 CHY = SGD 0.30

STEP 1:

Sell USD 12000 to buy SGD

To execute above transaction , exchange rate is 1 USD = SGD 1.65

Thus \$12000* SGD 1.65= SGD 19800

Now we have SGD 19800

STEP 2:

Sell SGD 19800 to buy CHY

To execute above transaction , exchange rate is 1 CHY = SGD 0.30

Thus SGD 19800/CHY 0.30= CHY 66000

Now we have CHY 66000

STEP 3:

Sell CHY 66000 to buy USD

To execute above transaction, exchange rate is 1 CHY = 0.16 USD

Thus CHY 66000* USD 0.16= USD 10560

Therefore by using traingular arbitrage , we make loss ( USD 10560 - USD 12000) = USD 10560

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