Question

Construct cross-rate for bid & ask prices IF dollar-euro exchange rate is USD1.25 = EUR1.00 and...

  • Construct cross-rate for bid & ask prices

IF dollar-euro exchange rate is USD1.25 = EUR1.00 and the dollar-Yen exchange rate is JPY200 = USD1.00. What is the EUR-JPY cross rate?

USD equivalent

Country

BID

ASK

Switzerland (Franc) CHF

$0.65/CHF

$0.68/CHF

Euro €

$1.15/€

$1.2/€
  • Triangular Arbitrage
    • Helen Depp, who trades at an FX cubicle in a big bank in UK notices the following exchange rates of the USD per pound and USD per euro.

$1.2195/€ or €0.82/$

$1.2262/£     or £0.8155/$

If she notices a correspondent bank quotes the cross exchange rate of €1.10/£. Is there an arbitrage opportunity? If so, how can Helen Depp exploit this if she has €1,550,000? Explain strategy and numbers for each step of the strategy.

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