Question

Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes:

Swiss franc/dollar = SFr1.6085/$

Australian dollar/U.S. dollar = A$1.8397/$

Australian dollar/Swiss franc = A$1.1533/SFr

Ignoring transaction costs, does Doug Bernard have an arbitrage opportunity based on these quotes? If there is an arbitrage opportunity, what steps would he take to make an arbitrage profit, and how much would he profit if he has $1,000,000 available for this purpose?

Answer 1

Given Details

Swiss franc/dollar = SFr1.6085/$

Australian dollar/U.S. dollar = A$1.8397/$

Australian dollar/Swiss franc = A$1.1533/SFr

Based on these quotes we can definitely make a profit by cross selling the currency.In this case Doug Bernard have one million dollars with this amount we can make profit in the following manner shown below

1).Base amount = 1,000,000 dollars

Situation 1(when start wih Swiss Francs)

First purchase the swiss francs with this million dollar amount and convert it into Australian dollar and then again reconvert it into USD in the following steps explained as below

Swiss francs purchased with USD =1,000,000*1.6085

=1,608,500 Swiss francs

Australian dollars purchased with Swiss francs =1,608,500*1.1533

=1,855,083.05 AUD

Finally convert Australian dollars into US Dollars =1,855,083.05/1.8397

=1,008,361.72 USD

Profit earned in USD=1,008,361.72-1,000,000

=8,361.72 USD

Situation 2(when start wih Australain Dollars)

First purchase the Australian dollars with this million dollar amount and convert it into Swiss Francs and then again reconvert it into USD in the following steps explained as below

Australian dollars purchased with USD =1,000,000*1.8397

=1,839,700 AUD

Swiss francs purchased with  Australian dollars =1,839,700/1.1533

=1,595,161,.71 Swiss Francs

Finally Swiss francs convert into US Dollars =1,595,161,.71/1.6085

=9,91,707.62 USD

Loss Incurred in USD=9,91,707.62 -1,000,000

=8,292.38 USD

Conclusion:Based on above calculaton and analysis there is opportunity to earn profit as shown in situation 1 as well as same chance to incurr loss as shown above in situation 2 .So kindly opt the right choice and earn the profit.