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Question: A)      Assuming triangular arbitrage is not possible and exchange rates...

a)      Assuming triangular arbitrage is not possible and exchange rates are priced efficiently, use the following quotes to determine the percentage change in the NZD against the JPY.

	Today	1 year ago
AUD NZD	1.0362	1.0965
AUD JPY	71.85	74.65

                                                  

b)     You have the following quotes from three different banks:

Big Time Bank	71.85 JPY AUD
Fack Bank	0.9601 AUD NZD
Trusty Bank	69.99 JPY NZD

If you can buy or sell at the given quotes, how much profit can you make using AUD $1 000 000. Clearly show each of your trades and give your profit in AUD.        

Answer 1

a)Applying the concept of Cross rate we can find the price of NZD in terms of JPY. i.e. JPY per NZD or JPY/NZD.

Currency Pair	Today	1Year Ago
NZD/AUD	1.0362	1.0965
JPY/AUD	71.85	74.65
JPY/NZD	69.33989577	68.08025536
%Change	1.8502%

In the above table we can see that AUD is common currency and is no the same side in both the quotes hence it can be cancelled out by deviding JPY/AUD quote by NZD/AUD quote and find the value of JPY/NZD.

% change has been calculated by following formula:

(Today price of NZD- 1 year ago price of NZD)/1year ago price of NZD.

b) We can apply the concept of triangular arbitrage to calculate the possible gain.

Convert AUD into NZD through Fack Bank:

=1000000/.9601NZD

Now convert NZD to JPY through Trusty Bank:

=1000000/.9601*69.99

Now reconvert JPY in to Aud =1000000/.9601*69.99/71.85

=1014595.078

Gain=14595.0785 (i.e.1014595.078-1000000)

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Good Luck!