Question

An investor holds 100,000 Yen and faces the following exchange rates: in Tokyo 1 Korean Won exchanges for 9.460 Yen, in Seoul 1 Yen exchanges for 0.106 Won. What trades would the investor like to make? What type of arbitrage condition is violated in this example

Please provide a full answer.

Answer 1

The trades to make are :

• Exchange 100,000 Yen for Won in Seoul. Won received = 100,000 * 0.106 = 10,600 Won
• Exchange 10,600 Won for Yen in Tokyo. Yen received = 10,600 * 9.460 = 100,276 Yen
• Arbitrage profit = 100,276 - 100,000 = 276 Yen

The market arbitrage condition is violated in this example because the exchange rate of two currencies is different in two markets, and thus an arbitrage profit is earned by simultaneously buying/selling the currency in different markets