Question

Question 7: You have $1,000,000 to invest and noticed the following. $1.20 = €1.00; $1.80 = £1.00; £1.00 = €1.50. How much money can you make? (8 points)

Answer 1

You cannot make any money with cross currency arbitrage.

The cross currency rates are arbitrage free, and converting $1,000,000 into other currencies, and then back into $ will not yield any profit.

For example, this is illustrated as below :

• You have $1,000,000 to invest. This is converted into £. £ received = $1,000,000 / 1.80 =  £555,555.56
• £555,555.56 is converted into €. € received = £555,555.56 * 1.20 =  €833,333.33
• €833,333.33 is converted into $. $ received = €833,333.33 * 1.20 = $1,000,000
• $ received after converting $ into £, £ into €, and € back into $ is the same. Hence, there is no profit made