Question

The exchange rates in New York are: $1 = AUD 1.2147 and $1 = £0.8195 A dealer is offering a quote: AUD 1 = £0.8703. What is the profit you can earn on $24764 using triangle arbitrage?

PLEASE HELP...ASAP!!!!!!!

Answer 1

Cross currency exchange rate in New York for AUD / £, 1 AUD =  £0.8195 / 1.2147 = £ 0.6745.

Exchange rate in New York, 1 AUD = £ 0.6745

Dealer exchange rate, 1 AUD = £ 0.8703

Therefore buy from AUD from New York exchange and sell AUD to Dealer

AUD to be bought in $ 24754 = 1.2147 x 24754 = AUD 30068.68

Sell AUD to Dealer and buy £, Therfore £ to be received = 30068.68 x 0.8703 = £ 26168.78

Convert £ to USD on New York exchange, Therefore $ received = £ 26168.78 / 0.8195 = $ 31,932.61

Therefore arbitrage gain = $31932.61 - $ 24754 = $ 7178.61