Question

Use the following information to answer the following 3 questions

Direct Market for C$/INR                            Bids                  asks

Deutsche Bank’s quote:                         C$.0855/INR     C$.0865/INR

Barclays’ quote:                                    C$.0857/INR     C$.0864/INR

CSFB’s quote:                                        C$.0860/INR    C$.0871/INR

Markets for INR/$ and C$/$

                                                      dollar bids        dollar asks        CAD bids            CAD asks

Deutsche Bank’s quote:                   INR 13.0/$        INR 13.3/$        $.865/C$          $.871/C$  

Barclays’ quote:                             INR 13.1/$        INR 13.5/$        $.866/C$           $.872/C$

CSFB’s quote:                                  INR 13.2/$        INR 13.35/$      $.867/C$          $.875/C$

1. What is the best direct C$/INR ask price? Compute the best indirect C$/INR bid price.    (These are the clockwise numbers)

2. What is the best direct C$/INR bid? Compute the best indirect C$/INR ask price. (These are the counter-clockwise numbers)

3. Determine if there is a triangular arbitrage opportunity. (Look clockwise and counter-clockwise) If there is an arbitrage opportunity, do it! How much risk-free arbitrage profit is there if you start with $1,000,000 and make one trip around the triangle?

Answer 1

1) Ask price is the which will have to pay to buy any currency. In this situation, the buyer will look for the lowest possible quote.
According to the above table, Barclay's quote is the lowest for ask price at C$.0864/INR

In the indirect quote, we take the inverse of a direct quote. So the above ask prices will like

Deutsche Bank	C$.0865	INR 11.5607/C$
Barclay's	C$.0864	INR 11.5740/C$
CSFB	C$.0871	INR 11.4811/C$

According to the above table, Barclay's quote for bid price looks best.

2) The bid price is the price which going on in the market to sell the currency. Traders will be willing to buy at this price.
A seller will look for the highest possible bid price and that happens to be from CSFB at C$.0860/INR.
Again for an indirect quote, we will take the inverse of those quotes.

Deutsch bank	C$.0855/INR	11.69591
Barclays	C$.0857/INR	11.66861
CSFB	C$.0860/INR	11.62791

According to the above table, CSFB ask price looks best in an indirect quote

3) Arbitrage trade is gaining profit through market anomalies in which a trader buys at the lowest rate and sells it at the highest rate. Here, a trader can buy USD at the highest possible INR bid price and then will buy C$ through that USD at lowest CAD ask price.

Highest bid quote - CSFB INR 13.2/$
Lowest CAD ask quote - Deutsch - $ 0.871/C$

triangular trade would have done straight if he had INR

We can get cross rates here for INR and C$ by multiplying bid and ask prices

Cross rates	Bid	Ask
	11.245	11.5843
	11.3446	11.772
	11.4444	11.68125

Now a trader can buy at 11.5843 and sell at 11.4444

( 11.5843 - 11. 4444 ) * 1000,000 = 139900