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19. Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is S.32 while the ask rate is S.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

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Answer #1

Answer 19:

Given:

Bank Y's bid rate for New Zealand dollar is $0.32 and ask rate is $0.325.

Bank X's bid rate for New Zealand dollar is $0.33 and ask rate is $0.335.

Transactions:

Buy New Zealand dollar at the rate of $0.325 from Bank Y.

New Zealand dollars I shall get = $1,000,000 / $0.325 = 3076923.07692 New Zealand Dollars

Now Sales the New Zealand Dollars to Bank X at $0.33.

US dollar, I shall get = 3076923.07692 * $0.33 = $1015384.62

Hence, Amount I shall earn = $1015384.61 - $1,000,000 = $15,384.62

Hence, Amount I shall earn = $15,384.62

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