Question

The following are quotes for several U.S. currency dealers.

Dealer	A	B	C	D	E
Japanese yen	109.03 109.06	109.04 109.08	109.06 109.10	109.05 109.07	109.07 109.09
British pounds	1.3115 1.3119	1.3118 1.3120	1.3115 1.3118	1.3116 1.3117	1.3115 1.3118

Inter-dealer arbitrage

1 a. Is there an arbitrage opportunity in Japanese yen? If so, what exchanges should you make to take advantage of it? (Be specific about which dealer you would select, what currency you would buy from or sell to that dealer, and how much of the other currency you would pay or receive.

b. How profitable is a round trip trade? (State the profitability either in percent or basis points.)

2 a. Is there an arbitrage opportunity in British pounds? If so, what exchanges should you make to take advantage of it? (Be specific as indicated in question 1.)

b. How profitable is a round trip trade? (State the profitability either in percent or basis points.)

Answer 1

1) The given currency is Yen/Dollar.

Calculation of arbitrage opportunity :   The person has to purchase dollars from dealer A by selling Yen and later the dollar should be sold with dealer E, in order to gain arbitrage advantage.

2) The given currency is Pound/Dollar.

Calculation of arbitrage opportunity: The person has to purchase dollars from dealer D by selling pounds and should sell the dollar with dealer B.