Question

1. Suppose the Euro is quoted in Australia at Aus$0.7275-80 and the Aus$ is quoted in Paris at € 1.3748-50. What should an Australian arbitrager do to maximize his profit? What is his gain?

Answer 1

In Australia,

1 Euro = $ 0.7275 -80

ie 1 $ = 1/0.7275 = 1.3736 - 1.3745 Euros

In Paris

$ 1 = 1.3748 - 1.3750 Euros

The arbitrager can buy Euros from the Australian market and sell the same Euros in the Paris market at a higher price

In this case, he/she can buy Euros from Australia at 1.3745 Euros and sell the same Euros for 1.3748.So the gain in this transaction = 1.3748 - 1.3745 = 0.0003 Euros