Question

Quotes for one U.K. pound:          NY   London
Bid price            $1.59 $1.63
Ask price            $1.60 $1.64
1. What is the net profit from the locational arbitrage?

2. Which price will increase after the locational arbitrage?

3. Which price will decrease after the locational arbitrage?
    
Value of pound in $   $1.61
Value of MYR in $   $0.20
Value of pound in MYR   MYR8.10
1. Which currency is overpriced?

2. What is the net profit from the triangular arbitrage?

3. Which price(s) will increase after the triangular arbitrage?

4. Which price(s) will decrease after the triangular arbitrage?

Answer 1

As per rules I will answer the first 4 sub parts of the question:

An investor will buy at the ask price and sell at bid price.

Hence the investor will buy at $1.6 from NY and sell at $1.63 in London.

1: Profit from the locational arbitrage = $0.03 per UK pound

2: Due to high demand in NY exchange, the ask price there will increase.

3: Due to large sales in London exchange, its bid price will drop.

4: 1 UK Pound= $1.61

1 MYR= $ 0.2

Hence 1 UK Pound= 1.61/0.2 = 8.05 MYR

Since the rate is 1 UK Pound= 8.10 MYR, the UK Pound is overpriced.