Question

Please show all your works, thanks

CALCULATION. Solve the following problem. For full credit, SHOW AND EXPLAIN your work. 4 points. 16) You specialize in cross-rate arbitrage. You notice the following quotations: Bank A: Swiss franc/US dollar = SF 1.20 /USD Bank B: euro/US dollar = EUR 1/USD Bank C: euro/Swiss france = EUR 0.60 / SF Ignoring transaction costs, do you have an arbitrage opportunity based on these quotations? If there is an arbitrage opportunity, what steps would you take to make an arbitrage profit, and how much would you profit if you have $100 available for this purpose? Note: 1/1.20 = 0.83 1/0.60 = 1.67 120 x 0.60 = 72 60 x 1.2 = 72 1.2 x 0.6 = 2 0.60 / 1.2 = 0.5 167 / 1.2 = 139.17 167 / 0.6 = 278.33

Answer 1

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Answer:

Yes, we have arbitrage opportunity First we have to calculate cross rate for SF/EUR SF SF EUR USD EUR SF EUR SF EUR 1.2 First get the SF by selling $ ( $100*1.2) $120.00 Purchase the EUR by such SF (120*1.2) $144.00 Sell the EUR to get $ ( 144 *1) $ 144.00 Arbitrage Gain $ 24.00