Question

Suppose that you’re given these quotes from three different banks: • Bank of America: USDEUR 0.700/0.7010 • Chase: GBPUSD 1.700/1.701 • HSBC: GBPEUR 1.200/1.201

e) What are the cross rates from these quotes? [10] f) Is there any arbitrage opportunity? [5] g) How would you take advantage of any arbitrage situation? [10] h) What is your profit? [5]

Answer 1

(g) &(f)

Triangular arbitrage can be applied to the three currencies – the US dollar, the euro, and the pound. To execute the triangular arbitrage opportunity, need to perform the following transactions: having capital of $1,000,000

1. Sell dollars for euros: $1,000,000 x 0.7= €700,000
2. Sell euros for pounds: €700,000 / 1.2 = £840,000
3. Sell pounds for dollars: £840,000 x 1.7= $1,428,000

So from Above example we can say we have profit of $428,000

So in % terms profit is 4.28%

If you like my answer please give thumbs up

Thank you in advance

From Mona....