Question

• 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.

Answer 1