Suppose the $/€ exchange rate is $1.1874 = €1.0, the Yen/€ exchange rate is 127.73 (1...

Suppose the $/€ exchange rate is $1.1874 = €1.0, the Yen/€ exchange rate is 127.73 (1 € will purchase 121.73 yen), and the US $ will purchase 105.68 yen. In this scenario arbitrage is possible. What is the potential profit per $1,000,000 US if one conducts triangular arbitrage?

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Solutions

Expert Solution

	Convert $ into Euro and then convert Euro into Yen. The Yen will be used to buy $ again

Step 1	Buy Euro from $1000000 at Euro 1= $1.1874
	=1000000/1.1874	=842176.18

	It will give us Euro 842176.18

Step 2	Buy Yen from Euro 842176.18 at Euro 1= Yen 127.73
	=842176.18*127.73	=107571163.47

	It will give us Yen 107571163.47

Step 3	Buy $ from Yen 107571163.47 at $1= Yen 105.68
	=107571163.47/105.68	1017895

	It will give us $ 1017895.18


	Hence the profit will be	=1017895.18 - 1000000
			=$17895.18

jeff jeffy answered 1 year ago

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