Question

Suppose Sumitomo Bank quotes the ¥/$ exchange rate as 110.30-.40 and Nomura Bank quotes 110.40-.50. Is there an arbitrage opportunity? If so, explain how you would profit from these quotes. If not, explain why not.

Answer 1

Arbitrage opportunity occurs when price we buy currency at lower rate and simultaneously sell the currency at higher rate and profiting from temporary differences in the price of exchange rate. This is a riskless profit for the trader.

In current case, the exchange rate quoted by Sumitomo Bank is ¥/$ as 110.30-0.40 means we can sell the currency for 110.30 and buy the currency at 110.40 and in exchange rate quoted by Nomura Bank we can sell the currency at 110.40 and buy the currency at 110.50 from the bank.

In this case no arbitrage opporunity is available as if we purchase the currency at 110.40 from Sumitomo bank which is the lowest rate of exchange for purchase as against nomura banks rate of 110.50 for purchase. The selling price at Sumitomo bank is 110.30 which is lower than the purchase price of 110.40 and the selling price at Nomura bank is 110.40 which is equal to purchase price of 110.40, hence in current situation there would be no arbitrage opportunity since the selling price available is less or equal to the purchase price.