Question

37--Given the following exchange rates, what arbitrage profit is available if you have $1 million? ¥129.87/$, €1.1226/$, ¥115.74/€

Select one:

a. $460

b. -$460

c. $878

d. $259,652

Answer 1

HI,

you have $1,000,000 initially

so at first from this $1,000,000 you will buy Euro

1 dollar = 1.1226 Euro

$1,000,000 = 1.1226*1000000 = $1,122,600 Euro

Now from this Euro amount you will buy Yen

1 Euro =115.74 Yen

1,122,600 Euro = 1122600*115.74 = 129,929,724 Yen

From Yen we will buy dollar again

1 Yen = 1/129.87 dollar

129,929,724 Yen = 129929724/129.87 = $1,000,459.88

So arbitrage price = 1,000,459.88 -1,000,000 = $459.88 ~$460

Hence option a is correct here.

Thanks