Question

Assuming no transaction cost,

A: You can buy a U.S. dollar for 10 pesos; The bank will pay you 9 pesos for a U.S. dollar.

B: You can buy a U.S. dollar for .9 euros; The bank will pay you .8 Euros for a U.S. dollar.

C: You can buy a euro for 14 pesos. The bank will pay you 13 pesos for a euro.

Reorganize the above into $/peso (A), $/euro (B), and euro/peso (C) and identify if triangular arbitrage is possible. What is your trading strategy? Compute the triangular arbitrage profit starting with $1,000,000.

Answer 1

1	Convert USD to EUR	$1,000,000.80
	Exchange Rate	EUR/ USD = 0.8 EUR
	EUR	800,000.00
2	Convert EUR to pesos
	Exchange rate	pesos/ EUR = 13pesos fo a EUR
	Pesos	800000*13
		10,400,000.00
3	Convert Pesos to USD
	Exchange Rate	Pesos/USD = 10 pesos per USD
	USD	10400000/10
		1,040,000.00
	Profit( USD) =	1040000-1000000
		$          40,000.00