Question

Three Exchange Rates are as follows: 1) US Dollars (USD) to Canadian Dollars (CAD) at CAD 1 to USD 1.05 2) CAD to Euros (EUR) at CAD 1.41 to EUR 1 3) EUR to USD at EUR 0.72 to USD 1 Suppose you start with USD 100,000, and do one round of "triangular arbitrage", that is convert make a total of 3 foreign exchange transactions to start from USD and return to USD. What will be your profit in USD?

Answer 1

Solution :

Solution:

As per the information given in the question we have

1 CAD = USD 1.05

1 EUR = CAD 1.41

1 USD = EUR 0.72

We start with USD 100,000

Transaction 1 : Sell USD to buy EUR

We have USD 100,000 to look for an arbitrage opportunity

We know that 1 USD =   EUR 0.72

Thus on sale /exchange of USD for EUR we will have

= USD 100,000 * EUR 0.72 = EUR 72,000

Transaction 2 : Sell EUR to buy CAD

We now have EUR 72,000

We know that 1 EUR = CAD 1.41

Thus on sale / exchange of EUR for CAD we will have

= EUR 72,000 * CAD 1.41 = CAD 101,520

Transaction 3 : Sell CAD to buy USD

We now have CAD 101,520

We know that 1 CAD = USD 1.05

Thus on sale / exchange of CAD for USD we will have

= CAD 101,520 * USD 1.05 = USD 106,596

The profit on the arbitrage opportunity in USD

= USD 106,596 - USD 100,000

= USD 6,596

Thus the profit in USD = $ 6,596