Question

Given the following exchange rate in Kuala Lumpur and Canberra:

USD/MYR = 4.2100 (Kuala Lumpur)

AUD/MYR = 2.8500 (Kuala Lumpur)

USD/AUD = 1.3529 (Canberra)             

(a) Determine if there is any arbitrage opportunities.

(b) Calculate the profit/ (loss) from the above triangular arbitrage assuming your investment start with MYR 3,000,000.00.

(c) Based from your answer in (b) above, which flow would you convert your investment?

Answer 1

(a)4.2100 MYR=1USD

2.8500MYR=1AUD

if there is NO arbitrage opportunities;

(1/4.2100)USD=(1/2.8500)AUD

1USD=(4.2100/2.8500)AUD=1.4772AUD

Actual USD/AUD=1.3529

Hence , there is arbitrage opportunity

(b)Calculation of Profit/(Loss) from Arbitrage:

FLOW 1

Convert 3 million MYR into USD

Amount of USD received=3million/4.2100=712,589 USD

Convert 712,589 USD to AUD

Amount of AUD received=712,589*1.3529=964,062 AUD

Convert 964062 AUD to MYR

Amount of MYR to be received=964062*2.8500=2,747,576

LOSS=3000000-2747576=252424 MYR

FLOW 2

Convert 3 million MYR into AUD

Amount of AUD received=3million/2.8500=1052632 AUD

Convert 1052632 AUD to USD

Amount of USD received=1052632/1.3529=778056 USD

Convert 778056 USD to MYR

Amount of MYR to be received=778056*4.2100=3,275,615

PROFIT =3275615-3000000=275,615 MYR

(c) FLOW2 should be followed to get arbitrage profit