Question: Homework 1 on Triangular Arbitrage with Bid-Ask Spread S ( / ) = S ($ / ) / S ( $ / ) Suppose Citibanks

Homework 1 on Triangular Arbitrage with Bid-Ask Spread

S ( / ) = S ($ / ) / S ( $ / )

Suppose

Citibanks quote: $1.5445 1.5460 /

Barclays quote: $1.9443 1.9453 /

Dresdners quote: 1.2789 1.2799 /

Cross-rate between Citibank and Barclay should be 1.2589 / , compared to the actual Dresdner quote of 1.2789 / .

Is triangular arbitrage possible if an investor starts with 1 million and follows the following two strategies independently?

(a) Euros to Dollars to Pounds to Euros.

(b) Euros to Pounds to Dollars to Euros.

If there are arbitrage gains or losses in either case, how much?

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Q:

Question on Triangular Arbitrage with Bid-Ask Spread? Homework 1 on Triangular Arbitrage with Bid-Ask Spread Suppose Citibank's quote: $1.5445 1.5460/ Barclay's quote: $1.9443-1.9453 / Dresdner's...

Q:

Triangular Arbitrage with Bid-Ask Spread S (/ ) = S($ / )/S($/ ) Suppose Citibank's quote: $1.5445 - 1.5460 / Barclay's quote: $1.9443 - 1.9453 / Dresdner's quote: 1.2789 - 1.2799 / Cross-rate...

Q:

Homework 1 on Triangular Arbitrage with Bid-Ask Spread S(E/E)-S (S/E)/S (s/e) Suppose Citibank's quote: $1.5445-1.5460 / Barclay's quote: $1.9443 -1.9453 / Dresdner's quote: 1.2789 1.2799/E...

Q:

S ( / ) = S ($ / ) / S ( $ / ) Suppose Citibanks quote: $1.5445 1.5460 / Barclays quote: $1.9443 1.9453 / Dresdners quote: 1.2789 1.2799 / Cross-rate between Citibank and Barclay should be 1.2589 / ,...

Q:

i need answer from 4 to 10 A U.S. company has issued floating-rate notes with a maturity of 10 years, aninterest rate of (6-month LIBOR+0.15%), and total face value of $10 million. The companynow...

Q:

You are a currency dealer in the interbank foreign exchange market and you note the following exchange rates available from your competitors. (Note: the base currency is listed first and the quote...

Q:

11. [5 pts] Challenging. Assume the U.S. and Europe are the only countries in the world. Suppose we observe the nominal interest rate in the United States fall and the dollar appreciate. Does the...

Q:

1. BMW needs to buy $10,000,000 to purchase CVJ boots (automotive parts) for its new Z4 model from DuPont. BMW's banker quotes bid ask rates of $1.12-$1.14/. What will be the euro cost of the boots?...

Q:

Question 1 Are the following statements true or false? Provide a short justification for your answer. ( Evaluations are based on your justification. ) ( 1 ) On a balance of payments table, the...

Q:

1. Interbank quotations that include the United States dollars are conventionally given in __________, which state the foreign currency price of one U.S. dollar, such as a bid price of SFr 0.85/$. A....

Q:

Show that (a) exp (2 3i) = -e2; (b) exp (2 + i/4) = e/2 (1 + i); (c) exp(z + i) = - exp z.

Q:

(a) Make a graph showing the retention time of each peak in Figure 24-25 in chromatograms B, F, and C as a function of position along the line BC. Predict the retention times for solvent compositions...

Q:

The following exchange rates are available to you. ( You can buy or sell at the stated rates. ) Assume you have an initial SF 1 4 , 9 9 7 , 5 4 8 . Calculate the amount of profit in Swiss francs ....

Q:

Add "Viggo Mortenslet cast = new Map ( ) ;en " to the cast as the key, with value "Aragorn".