Question

BF2207 Question 3 DBS Bank in Singapore and Malayan Banking Berhad (MBB) in Malaysia give quotes for Malaysian ringgit (MYR), Singapore dollar (SGD) and Thai baht (THB) as follow: In Singapore at DBS: Spot exchange rate for MYR Spot exchange rate for THB In Malaysia at MBB: Spot exchange rate for SGD Spot exchange rate for THB Bid 0.320 SGD 0.039 SGD Bid 3.147 MYR 0.125 MYR Ask 0.325 SGD 0.042 SGD Ask 3.159 MYR 0.133 MYR Assume that you have 10,000 SGD. Is there an arbitrage opportunity? If so, explain clearly the order of the transactions that you would execute, and the SGD profit that you would earn, accurate to the nearest cent. If you cannot earn a profit from arbitrage, explain why (22 marks)

Answer 1

Following are the steps to get arbitrage profit:

1. Sell 10000 SGD for MYR at MBB
   • Quotes are given from the bank's perspective
   • bid is where the bank is buying the currency for which the rates are expressed in other currency
   • ask is where the bank is selling the currency for which the rates are expressed in other currency
   • So if we want to sell SGD at MBB, the bank needs to buy it so we need to look at the bid rate
   • 3.147 MYR= 1 SGD
   • So 10000 SGD = 10000 x 3.147 MYR=  31470
2. Sell MYR for SGD at DBS
   • If we want to sell MYR, the bank has to buy it, so we need to look at the bid rate
   • 1MYR = 0.320 SGD
   • So 31470 MYR = 31470 x 0.320 = 10070.4 SGD
   • That is a risk-less profit of 10070.4 - 10000 = SGD 70.40
3. There are toher ways of conversion but non led to a profitable situation except this one