Question

5. Assuming the following quotes, show how a market trader at Citibank with USD1,000,000 can make...

5. Assuming the following quotes, show how a market trader at Citibank with USD1,000,000 can make an arbitrage profit and calculate that profit and return.

• Citibank: USD/GBP = 1.35

• CIBC: EUR/GBP = 1.15

• Deutsche Bank: USD/EUR = 1.06

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Answer #1
1 Convert USD to EUR $1000000/1.06
Exchange Rate (Deutsche Bank ) USD /EUR = 1.06
EUR
€   943,396.23
2 Convert EUR to GBP
Exchange rate (CIBC Bank ) EUR / GBP = 1.15
GBP 943396.23/1.15
       820,344.54
3 Convert GBP to USD
Exchange Rate (CITI Bank ) USD / GBP = 1.35
USD 820344.54*1.35
   1,107,465.14
Profit( USD) = 1107465.14-1000000
$   107,465.14
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