Question

1. Use the following information to answer the next two questions.

   Suppose you see the following quotes for pounds at three banks.

   Bank X:$1.255-65

   Bank Y:$1.245-59

   Bank Z:$1.258-61

   Find the locational arbitrage profit available to someone with access to $1,000,000

   		9638.55
   		0
   		1593.63
   		3182.18

6.25 points   

QUESTION 4

1. The ask quote at Bank Y must increase to prevent the arbitrage opportunity found in the previous question.

   True

   False

Answer 1

From the given quotes we can observe that the least rate at which we can buy the pounds is from Bank Y which has ask rate of 1.259

Number of pounds we can get = 1,000,000 / 1.259

= 794, 281.18

To get arbitrage profit we must sell pounds for greater than 1.259 , from the given quotes no bank offers a price more than 1.259, highest bid is from bank Z which is 1.258 (we get 794,281.18 * 1.258 = $999,205.72)

hence No arbitrage profit available

arbitrage profit = 0

Q4)

This statement is False because no arbitrage profit available