1 On your postgraduation celebration trip you are leaving Pa

1. On your post-graduation celebration trip you are leaving Paris for St. Petersburg, Russia. You leave Paris with 10,000 Euros in your money pouch. Wanting to exchange all of these for Russian Rubles, you obtain the following quotes: Spot rate (S/e) $1.4260/ Spot rate (Rubles/S) Rbl24.75/Ss a. What is the Russian Ruble/Euro cross rate? b. How many rubles will you obtain för your Euros (assuming no bid-ask spread)? 2. Suppose the following exchange rates are quoted: Citibank $1.2223/ Barclays Bank $1.8410/E Dresdner Bank 1.5100/E Is there a triangular arbitrage opportunity? If so, how much will you end up with if you start the arbitrage with $1,000,000? 3. Triangular Arbitrage Assume the following quotes, calculate how a market trader at Citibank with $1,000,000 can make an inter- market arbitrage profit.: Citibank quotes U.S. dollar per pound: $1.5400/E National Westminster quotes euro per pound: 1.6000/£ Deutsche Bank quotes dollars per euro: $0.9700/ 4. Triangular Arbitrage Riskless profit using 10,000,000 Swiss franc. Thg following exchange rates are available to you. (You can buy or sell at the stated rates.) Mt. Fuji Bank Y120.00/S Mt. Rushmore Bank SF 1.6000/S Mt. Blanc Bank ¥80.00/SF English (US)

Solution

QUESTION 4

So We have 10,000,000 Swiss franc.

For a Triangular Arbitrage we move the money in all the 3 currencies and at the end we get more then what we actually had.

So Like every trangle arbitrage we have 2 path for the movement.

PATH 1 =) Swiss Franc - Yen - Dollar - Swiss franc

PATH 2 =) Swiss Franc - Dollar - Yen - Swiss franc

Now let us calculate the profit in both the 2 path.

PATH 1

Step1 : Given rate is 1SF = Yen 80.

We have 10,000,000 Swiss Franc. We sell Swiss Franc and buy Yen.

Yen we receive = (10,000,000 * 80) i.e. 800,000,000 Yen

Step 2: Now we sell Yen and Buy Dollar. So given rate is 1Dollar = Yen 120.

Dollar we receive on selling the Yen is = (800,000,000 / 120) i.e. $ 6,666,666.67

Step 3: Now we sell this dollar and buy Swiss franc. So the given rate is 1Dollar = 1.6 Swiss Franc

Swiss Franc we receive on selling Dollar = (6,666,666.67 * 1.6) i.e. 10,666,666.67

Conclusion: So we had used 10,000,000 Swiss Franc at beggining and by the end we had 10,666,666.67 Swiss Franc.

Hence arbitrage profit exist in path 1.

Arbitrage Profit (Riskless profit) = (10,666,666,.67 - 10,000,000) i.e. 666,666.67 Swiss Franc.

We need not to do PATH 2 as because arbitrage profit exist in path 1 and automatically path 2 will come lower.

Note: I have used path 1 and i got the answer, sometimes it may so happen that in path 1 there may be loss, so we need to do path 2 in order to get arbitrage profit).

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