Question: 12. Triangular arbitrage Three currency traders quote the following spot exchange rates: Cameron Sloane Ferris USD/CAD 1.300 USD/MXN 18.50 CAD/MXN 14.20 a. Which of the

12. Triangular arbitrage Three currency traders quote the following spot exchange

12. Triangular arbitrage Three currency traders quote the following spot exchange rates: Cameron Sloane Ferris USD/CAD 1.300 USD/MXN 18.50 CAD/MXN 14.20 a. Which of the following appears to be true? Ferris's quoted cross rate of CAD/MXN 14.20 conforms to the law of one price. B Ferris's quote of CAD/MXN 14.20 appears to be relatively low compared to the CAD/MXN cross rate implied by Cameron's and Sloan's CAD and MXN quotes versus the USD. Positive arbitrage profits would be generated by a triangular trade involving selling USD for MXN with Sloane, then trading MXN to Ferris for CAD, and then buying USD from Cameron with CAD. C Ferris's quote of CAD/MXN 14.20 appears to be relatively high compared to the CAD/MXN cross rate implied by Cameron's and Sloan's CAD and MXN quotes versus the USD. Positive arbitrage profits would be generated by a triangular trade involving selling USD to Cameron in exchange for CAD, then trading CAD to Ferris in exchange for MXN, and then buying USD from Sloane with MXN. b. Sketch the profitable triangular arbitrage trade below (clockwise, or counter clockwise). Identify the profit on an initial trade of USD $10 million. USD 10,000,000 Arbitrage profit = $ Cameron USD/CAD 1.300 Sloane USD/MXN 18.50 Ferris CAD/MXN 14.20

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