Question

1. (5 points) Assume the following information for a bank quoting on spot exchange rates: Exchange rate of pound in U.S. S Exchange rate of Singapore dollar in U.S. $ Exchange rate of pound in Singapore dollars $1.50 $.30 S$5.20 Given this information, if triangular arbitrage is possible, which of the following answer is the correct arbitrage strategy. a). Convert USD to Singapore dollar, then to British pound, and finally back to USD b). Convert USD to British pound, then to Singapore dollar, and finally back to USD Please briefly explain why.

Answer 1

(a) USD → SA D > GBP → USD Let we assume Investment $ 1000 convert $ 1000 into SGD using 0.30 Rate value in SaA = $1000 u 0.30 = SAD 3,333.33 Convent SAA 3.333.33 into GBP using 5.20 Rate value in GBP = SAD 3333.33 = 5.20 - GBP 641.03 3 convert Back GBP 64103 into USD using t.so Rate. Value in USD = GBP 641.03 x 1.50 = USD 961.54 © Conclusionitose of USD 38.46. (1000 - 961.54)

(b) USD GBP → SAD → USD let us assuma Investment $1000 Convert USD 1000 into GBP using 1.50 Rate Value in GBP = USD 1000 & 1.50 = GBP 666.67 Convert GBP 666.67 into SAD using 5.20 Rate value in SGD = GBP 666.67 X 5.20 = SGD 3466.68 ③ Convert SGD 434 66 68 into USD using 0.30 Rate value in USD = SUD 3466.68 80.30 - USD 1040 4 Conclusion: chain of $40 ($1040 - $1000) hain of 4% (40) Triangular Arbitrage .

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