Question

Mary, has the following FOREX quotes:

1.1837 EUR/USD

0.7231 EUR/GBP

1.6388 GBP/USD

Will Mary be able to earn some profit for her institution by playing the FOREX market by using the quotes she saw on her screen when she returned from the terrace after the shopping disaster? If so, compute the profit. What is such type of profit called?

Answer 1

We will have to conduct a triangular arbitrage using the above rates

Step 1 We will start from USD 1 million

Step 2 We will convert USD 1 million to GBP using rate 1.6388 GBP/USD

GBP = 1 million * 1.6388 = 1.6388 million GBP

Step 3 Convert 1.6388 million GBP to Euro using rate 0.7231 EUR/GBP

Euro = 1.6388 * 0.7231 = 1.18501628 Million Euro

Step 4 - Convert 1.185016.28 Million Euro back to USD using rate 1.1837 EUR/USD

USD = 1.185016.28 / 1.1837 = 1.001112005 million

Step 5 - Triangular Arbitrage profit = 1.001112005 - 1 = 0.001112 million OR $ 1112

Such type profit is called arbitrage profit, this involves sure shot profit without risk