Question

Assuming no transaction cost, A: You can buy a U.S. dollar for 10 pesos; The bank...

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.

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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
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