Question

Please Only Answer Section B and C Thanks

4. (a) You observe the following quotes for the USD/AUD in the spot market from two banks:
Bank of Sydney
Bank of New York
Bid
Ask
Bid
Ask
0.6926
0.6928
0.7030
0.7075
Do these quotes imply the possibility of earning a profit by using locational arbitrage? If so, calculate the potential profit if you are able to use AUD 25,000. If not, explain why arbitrage is not possible?

Please Only Answer Section B and C Thanks

(b) You observe the following quotes for the GBP /AUD in the spot market from two banks:
Bank of Melbourne
Bank of London
Bid
Ask
Bid
Ask
0.5453
0.5458
0.5407
0.5411
Do these quotes imply the possibility of earning a profit by using locational arbitrage? If so, calculate the potential profit if you are able to use GBP 50,000. If not, explain why arbitrage is not possible?

c) You observe the following quotes for the CHF /AUD in the spot market from two banks:
Bank of Australia
Bank of Switzerland
Bid
Ask
Bid
Ask
0.7002
0.7095
0.7054
0.7116
Do these quotes imply the possibility of earning a profit by using locational arbitrage? If so, calculate the potential profit if you are able to use CHF 250,000. If not, explain why arbitrage is not possible?

Answer 1

The quotes were given with rates different in 2 banks

So opportunity cost exists.

In the question, the order in which bid and ask rates are mentioned were confusing. So i assumed that the first 2 rates as the bid- ask rate order of the first bank mentioned on the top.

Kindly check the answer and revert back if any issues are there.

b) GBP/AUD :- - Bank of Melbourne 13 Bank of London - Bid ASK 0.5453 -0.5458 0.5407-0.5411 . from So, for some exchange woency, a types of quotes are there 2 different banks, so. There is an arbitrage profit possibility. Now, If we are going to use GBP 50,000 we buy 50,000 GBP from Bank of Melbourne. which will you 91609 AUD (50.00 enpense we sell those 50,000 GBP to Bank of London which will get you 92,473 AUD (50,000 income. So, cash inflow - Cash outflow = 92473-91609 Profit = AUD 864 c) CHF/AUD - Bank of Australia 0.7002 - 0.7095 Bank of Switzerland 0.7054 -0.7116 Same as above, there is arbitrage profit opportunity exists. Now, if we are going to use CHF 2,50,000 we buy 250,000 CHF from Bank of Switzerland which will cost you 351321 AUD 25.000 ) experye we sell those 2,50,000 CHF to Bank of Australia which will get you 3,57,041 (250,002 → income. so, Cash inflow - Cash Outflow a 357041 - 351321 Profit : AUD 5,720