Question

# Assume you are a currency trader and have an initial SF 12,000,000 to trade. You can...

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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