Question

Consider the following information:

- 1 Euro per $1

- 2 Swiss Franc per $1

- 0.6 Euro per 1 Swiss Franc

If we start with $100 what is the profit (if any) we could make in US dollars through a triangle arbitrage using these rates.

Answer 1

We can use triangular arbitrage by buying Swiss Franc using US Dollars and converting Swiss Franc to Euro and then converting back Euros to US Dollars.

On converting US Dollars to Swiss Franc:

Given 2 Swiss Franc per $1. So, $100 can converted to 200 Swiss Franc.

On converting Swiss Franc to Euro:

Given 0.6 Euro per 1 Swiss Franc. So, 200 Swiss Franc can be converted to 200*0.6= 120 Euros

On Converting Euro to US Dollars:

Given 1 Euro to $1. So, 120 Euros can be converted to $120.

So, Using Triangular arbitrage, Profit is $120-$100= $20