Question

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17. 10 points The following exchange rates are available to you. (You can buy or sell at the stated rates.) Assume you have an initial 1 million dollars. Can you make a profit via triangular arbitrage? If so, show the steps and calculate the amount of profit in dollars. Mt. Eta Bank $1.29420/GBP Mt. Blanc Bank Eurol.18413/GBP Mt. Rushmore Bank $1.0920/euro

Answer 1

Answer

Cross currency rates as given in the question:

GBP 1    -              $1.29420

GBP 1    -              Euro 1.18413

Euro 1   -              $1.0920

Since the cross currency rates are given here. We can make arbitrage profit by using these rates. As per question we have $1,000,000 and have to make arbitrage profit using this amount.

First of all, we will convert this $1,000,000 into Euro which will give us Euro 915,750.92 ($1,000,000/$1.0920).

Now, we will convert this Euro 915,750.92 into GBP which will give us GBP 773,353.36 (Euro 915,750.92/Euro 1.18413).

Then, we will convert this GBP into Dollars which will give us $1,000,873.92 (GBP 773,353.36 x $1.29420).

Final Answer – Initially we had $1,000,000 which has been converted into $1,000,873.92 through triangular arbitrage. The profit in dollars is $873.92 ($1,000,873.92 - $1,000,000).