Assume you are a trader with JP Morgan. From the quote screen on your computer terminal, you
Question:
Assume you are a trader with JP Morgan. From the quote screen on your computer terminal, you notice that Bank A is quoting €0.8354/$1.00 and Bank Bis offering SF1.0913/$1.00. You learn that Bank Cis making a direct market between the Swiss franc and the euro, with a current €/SF quote of 0.7812(= €0.7812/SF).
(1) Show how you can make a triangular arbitrage profit by trading at these prices. (Ignore bid-ask spreads for this problem.) Assume you have $1 million with which to conduct the arbitrage. How much is your dollar-based profit? (10points)
(2) What €/SF price will eliminate triangular arbitrage?(2points)
(3) What happens if you initially sell dollars for euros? (3 points)
International Financial Management
ISBN: 978-0078034657
6th Edition
Authors: Cheol S. Eun, Bruce G.Resnick