Question

Question 3

Profit opportunities arise from cross rate differences between financial centres. On 9th September 2020, you noticed the following FX rates of various banks:

Amato Bank quotes Japanese yen per Australian dollar (Yen/A$)	82.00
Sanio Bank quotes Japanese yen per SFr (Yen/SFr)	97.00
XYZ Bank quotes Swiss franc (SFr) per Australian dollar (SFr/A$)	1.15

i) Is there any arbitrage opportunity? Calculate the relevant cross rate that may lead to arbitrage profit.

ii) Using a hypothetical amount of A$1,000,000 to invest, show how an investor can make arbitrage profit. [3 + 3 = 6 marks]

Answer 1

Answer-

Amato Bank Quote A$= 82 Yen

Sanio bank quote Sfr= 97 Yen

XYZ bank quote A$=1.15 SFr

(i) Let we take 1.15SFr from XYZ bank against 1A$

So by exchanging 1.15SFr from savio bank we get= 1.15*97Yen = 111.55Yen

By exchanging 111.55 Yen from Amato bank we get= (111.55/82)A$ = 1.36$

So we get a profit of 1.36-1= 0.36$

So Yes arbitrage opportunity exist

Calculation of cross rate for arbitrage

Sanio bank rate * XYZ bank rate

= (Yen/SFr) x (SFr/A$)

= A$= 111.55Yen

So for arbitrage we will sell A$ at cross rate and buy A$ from Amato bank

(ii) Calculation of Arbotrage profit from investing A$ 1000000

Step 1- We will sell A$1000000 to XYZ bank and take SFr

SFr= 1.15* 1000000

= 1150000 SFr

Step 2- We will sell SFr and buy Yen from Sanio bank

Yen = 97* 1150000

=111550000 Yen

Step 3- We will sell Yen and buy A$ from Amato bank

A$= 111550000/82

A$= 1360365.85

So arbitrage profit = 1360365.85-1000000

= 360365.85 A$