Question

Triangular arbitrage: The following exchange rates are available to you. (You can buy or sell at the stated rates. Assume you have an initial $10,000,000. Can you make a profit via triangular arbitrage? If so, show the steps and calculate the amount of profit in US dollar.

Mt. Fuji Bank ¥100.00/$

Mt. Rushmore Bank CHF0.97/$

Mt Blanc Bank ¥95.00/CHF

Answer 1

Solution :

Triangular Arbitrage:

The following information is given in the question:

Mt. Fuji Bank ¥ / $ =         100.00   ¥

Mt. Rushmore Bank CHF/$   = 0.97 CHF             

Mt. Blanc Bank   ¥ / CHF =    95.00 ¥

Using the information above, a round of triangular arbitrage using $ 10,000,000 with three foreign exchange transactions can be done as follows:

Transaction 1:

Sell 10,000,000 $ to buy ¥

To buy ¥ we use the ¥ / $ rate of, one $ = 100.00   ¥

Thus we have

= $ 10,000,000 * 100 ¥ = ¥ 1000,000,000

Transaction 2:

Sell ¥ 1000,000,000 to buy CHF

To sell ¥ we use the ¥ /CHF rate of , one CHF = 95 ¥

Thus we have

= ¥ 1000,000,000 / 95 CHF = 10,526,315.79 CHF

Transaction 3:

Sell CHF to buy US Dollars

To sell CHF we use the CHF / $ rate of one CHF = 0.97 $

= CHF 10,526,315.79 / 0.97 $ = $ 10,851,871.95

Therefore the using triangular arbitrage and using an Investment of $ 10,000,000 we can earn a profit of

= ($ 10,851,871.95 - $ 10,000,000) = $ 851,871.95