Your broker gives you the following rates for AUD, JPY, and CAD: AUD0.007/JPY, AUD0.821/CAD and JPY118?CAD....

Your broker gives you the following rates for AUD, JPY, and CAD: AUD0.007/JPY, AUD0.821/CAD and JPY118?CAD. Which of the following is UNLIKELY to occur if the market reversess back to its equilibrium state in which there are no triangular arbitrage opportunities

A) the AUD/CAD will increase
B) the AUD/JPY will increase
C) The JPY/CAD will increase
D) nothing will change

Solutions

Expert Solution

Answer-

Given

AUD/JPY = .007 / 1
AUD/CAD = 0.821 / 1
JPY/CAD = 118

Here

JPY/AUD = 1 / AUD/JPY = 1 / 0.007/1 = 142.86 / 1

JPY/CAD = JPY/AUD x AUD/CAD = 142.86 x 0.821 = 117.29

JPY/CAD has increased as now only 117.29 JPY are required rather than 118 JPY

AUD/CAD = AUD/JPY x JPY/CAD = 0.007 x 118 = 0.826

AUD/CAD has decreased from 0.821 to 0.826 as more AUD are required to purchase CAD.

it is UNLIKELY to occur if the market reverses back to the equilibrium state if there are no triangular arbitrage opportunities.

Theefore the correct option is A. AUD/CAD will decrease instead of increase.

jeff jeffy answered 2 years ago

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