Question

Angela has 1 million NZD and faces the following rates: EUR/USD=1.1110/12,
USD/NZD=1.4505/09, EUR/NZD= 1.6136/1.6140.
a) Can Angela make a profit by trading the three currencies? If so, how much profits in terms of NZD
can she make with her own fundsin one round? (Hint: choose the right bid or ask price for trading)
b) If all traders on the spot market behave like Angela, what would happen to the spot rates of the
three currencies and why? (Hint: the spread is usually constant on the forex market, e.g., if Euro
appreciates against US dollar, the spot rates become EUR/USD=1.1120/22)

Answer 1