Question

Assume the following information:

USD/AUD, bid/ask: 0.68 / 0.72
USD/MXP, bid/ask: 0.072 / 0.075
MXP/AUD, bid/ask: 8.17 / 8.32

Assume you have 1 million USD to conduct one cycle of triangular arbitrage. What will be your profit from implementing this strategy? Remember to pay careful attention whether you're trading at the bid or the ask with the bank.

Answer 1

For completing the one cycle of triangular to gain arbitrage we use following process :-

Currently we have $ 10,00,000 /-

Now we will buy MXP at ask rate (As the rate is for MXP) @ 0.075

So MXP we will have = $10,00,000/MXP0.075

= MXP 1,33,33,333.33

Now we will buy AUD at ask rate @ 8.32.

So AUD we will get = MXP 1,33,33,333.33/AUD 8.32

= AUD 16,02,564.10

Now we will sale AUD at Bid rate (Since the rate is for Aud and not USD) @ 0.68

So USD we will get = AUD 16,02,564.1 * USD 0.68

= USD 10,89,743.59

So Arbitrage Gain = USD 10,89,743.59 - USD 10,00,0000

= USD 89,743,59

Hence Arbitrage Gain = USD 89,754.59

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