You are a US-based treasurer with USD 1,250,000 to invest. Your bank quotes you the following...
You are a US-based treasurer with USD 1,250,000 to invest. Your
bank quotes you the following exchange rates: USD 1.00 / EUR and
EUR 1.25 / GBP and GBP 0.64 / USD. What is your arbitrage profit in
USD if you take advantage of triangular arbitrage?
Homework Answers
| Eur | 1 USD | ||||
| GBP | 1.25 Eur | ||||
| USD | 0.64 GBP | ||||
| US treasurer should purchase EUR from USD 1,250,000 | |||||
| Value of EUR purchased | 1250000*1 | ||||
| Value of EUR purchased | 1250000 | EUR | |||
| From EUR, treasurer should purchase GBP | |||||
| Value of GBP purchased | 1250000EUR/1.25 | ||||
| Value of GBP purchased | 1000000 | GBP | |||
| Treasurer should than convert GBP into US Dollar | |||||
| Value of USD converted | 1000000 GBP/0.64 | ||||
| Value of USD converted | $1,562,500 | ||||
| Abritrage profit | Amount converted into USD - Amount invested | ||||
| Abritrage profit | 1562500-1250000 | ||||
| Abritrage profit | $312,500 | ||||
| Thus, arbritrage profit is $312,500 | |||||
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