Assume you are a currency trader and have an initial SF 12,000,000 to trade. You can buy or sell currencies at the rates stated below: Mt. Fuji Bank ¥ 92.00/$ Mt. Rushmore Bank SF 1.02/$ Mt. Blanc Bank ¥ 90.00/SF Can you make a profit via triangular arbitrage? If so, show the steps and calculate the amount of profit in Swiss francs. [10 marks]
Solution:-
First we need to calculate Cross rate -
SF/¥ = SF/$ * $/¥
SF/¥ =
SF/¥ = 90.196
Actual Rate = SF/¥ =90
Implied Rate = SF/¥ = 90.196
SF are smaller in actual than implied rate.
So Buy SF and Sell ¥ at SF/¥ 90.
First we sell SF to buy $ -
= $11,764,706
Then Sell $ to buy ¥ -
$ = ¥1,082,352,941
Then Sell ¥ to buy SF-
¥ = SF 12,026,144
Amount of Profit = SF12,026,144 - SF12,000,000 = SF26,144.
Hence, Amount of profit is SF26,144.
If you have any query related to question then feel free to ask me in a comment.Thanks.
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