James, an investor who is actively looking for the opportunity to gain from arbitrage. He acquires the following quotes from three different banks. Bank A is willing to buy or sell Japanese yen at an exchange rate of 113 yen per dollar. Bank B is willing to buy or sell the Argentine peso at an exchange rate of $0.40 per peso. Bank C is willing to exchange Japanese yen at an exchange rate of 1 Argentine peso for 42 yen.

a) Show how James can make a profit from triangular arbitrage?

(4 marks)

b) What is the James profit/loss would be if he had $2,000,000?

(4 marks)

c) As investors engage in triangular arbitrage, explain how their activities influence each of the exchange rates until triangular arbitrage is no longer feasible

Answer rating: 100% (QA)

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