Question

1. Assuming no transaction costs, suppose the following quotes are available [NY: $1.309/£, Paris: $1.1795/€, London: €1.1011/£]. How could you take profitable advantage of these rates? Assume you have $1,000,000.

Answer 1

First exchange $1,000,000 for euros in paris market = $1,000,000 / 1.1795

=>euros 847,816.872.

now,

exchange this euros for Pounds in London

=>euro 847,816.872 / 1.1011

=>769,972.638 pounds.

now,

exchange these pounds for dollars in NY  

=>769,972.638 pounds *$1.309 per pound

=>$1,007,894.18.

We started with $1,000,000 and we now have $1,007,894.18.

so there is a profit of ($1,007,894.18 - 1,000,000)=>$7,894.18.