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Suppose you observe the following quotes for EUR at two different banks. At Bank X, the...

Suppose you observe the following quotes for EUR at two different banks. At Bank X, the bid is USD 0.330 / EUR and the ask is USD 0.335 / EUR. At Bank Y, the bid is USD 0.315 / EUR and the ask is USD 0.320 / EUR. What is your gain if you use USD 1,000,000 to take advantage of this locational arbitrage opportunity? That is, how much will you end up with over and above the USD 1,000,000 that you started with?

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Answer #1

Following steps will be taken

Convert USD 1,000,000 into EUR at Bank Y and get

1,000,000/0.320

= EUR 3,125,000

Convert into USD at Bank X and get 3,125,000*0.330 = USD 1,031,250

Arbitrage gain = $31,250

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