QUESTION 12 25 p Assume the bid rate of a a British pound is

QUESTION 12 2.5 p Assume the bid rate of a a British pound is $1.150 while the ask rate is $1.558 at Commerce Bank. Assume the bid rate of the British pound is $1.120 while the ask rate is $1.130 at PC National Bank. Given this information, what would be your gain if you use $1,800,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,800,000 you started with? $29,673 $31,858 None of the answers listed is correct. $35,893 $30,950

Solution

Locational arbitrage is possible when the bid price of a bank is higher than ask price of another bank. In the given case, locational arbitrage is possible since bid price of Commerce Bank is more than ask price of PC National Bank.

$1,800,000 will be used to buy dollars from the PC National Bank.

Number of dollars to be bought = 1,800,000/1.130

= 1,592,920.35

Now, 1,592,920.35 dollars will be sold at Commerce Bank at $1.150

Hence, sale price of dollars = 1,592,920.35 x 1.150

= $1,831,858

Hence, net gain realized = 1,831,858 - 1,800,000

= $31,858

Hence, correct option is (b)