Question

Suppose you are given the following exchange rates:
0.0094/0.0098 $/¥
60.7492/60.7512 ¥/CHF
0.5837/0.5841 $/CHF
Is there a triangular arbitrage opportunity? Describe the steps involved if you can start with 1 million CHF.

Answer 1

$/Yen = 0.0094-0.0098

$/CHF = 0.5837-0.5841

From above,

Bid Yen/CHF = Bid Yen/$ * Bid $/CHF = (1/Ask $/Yen) * 0.5837 = 0.5837/0.0098 = 59.5612

Ask Yen/CHF = Ask Yen/$ * Ask $/CHF = (1/Bid Yen/$) * 0.5841 = 0.5841/0.0094= 62.1383

Cross Rate = Yen/CHF = 60.7492-60.7512

2 approaches to arbitrage are as follows:

(i) Buy CHF via $ rate i.e. 62.1383(ask rate) and Sell CHF via cross rate i.e. 60.7492(bid rate)

(ii) Buy CHF via cross rate i.e. 60.7512(ask rate) and Sell CHF via $ rate i.e. 59.5612(bid rate)

Both the Approache will Result in LOSS.

Therefore, There is NO ARBITRAGE OPPORTUNITY.