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8. Assume the following exchange rate: Ess - 1.1, Es/CD = .8, EC/CAD - .75. CAD is the symbol for the Canadian dollar. Explai
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Answer #1
  • Quotes are given in the form of Price currency/Base currency
  • Base currency is in the denominator and its 1 unit is priced in terms of price currency
    • Step Currency Action Amount Remark
      1 USD 1000000 Sell 1000000/0.80 = CAD 1250000 Buy CAD, Sell USD
      2 CAD 1250000 Sell 1250000 x 0.75 =EUR 937500 Buy EUR, Sell CAD
      3 EUR 937500 Sell 937500 x 1.1 = USD 1031250 Buy USD, Sell EUR
    • So we started with USD 1000000 and ended with USD 1031250
    • So the triangular arbitrage profit was for USD 31250
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