Question

Assume that you are a trader with Barclays Bank in London. From the screen on your terminal, you notice that HSBC Bank is quoting $ 1.5150 / £ 1.00. Credit Suisse is quoting SF 1.4150 / $ 1.00. You learn that UBS is making a direct market between Swiss franc and British pound, with a current SF/ £ quote of 2.1625. Assume you have $ 100,000 to conduct the arbitrage.

a) Is there an arbitrage opportunity? Show the required calculations.

b) If your answer to part a is yes, show how you can make a triangular arbitrage profit by trading at these prices explaining each step in the arbitrage process.

c) What should be the equilibrium SF/ £ price to prevent any arbitrage opportunity?

Answer 1