Question

2. Suppose the following exchange rates are available: AUS$1.2452/C$ AUS$1.6984/US$ C$1.5625/US$ Assume you are a Canadian trader with C$1,000,000. What will you do? How much is your gain?

Answer 1

Cross rate C$/US $ = (C$/AUS$)*(AUS$/US$)

= (1/1.2452)*1.6984

= C$1.3639/US$

Since the actual rate is different, arbitrage opportunity exists

Following steps will be taken:

Convert C$ into AUS$ and get 1,000,000*1.2452 = AUS$1,245,200

Convert into US$ and get 1,245,200/1.6984 = US$733,160.62176

Convert into C$ and get 733,160.62176*1.5625 - C$1,145,563.47

Gain = C$145,563.47