Question

Your favorite bank trader calls you and tells you that she can execute the trades at the following quoted bid-ask spot prices: Bank A: Korean won 100 - 110 per Singapore $, Bank B: Hong Kong $3.50 – 3.60 per Singapore $ and Bank C: Korean won 30 - 32 per Hong Kong $, If you have access to a line of credit of Hong Kong $100,000 mil, based on cross-exchange rates and triangular arbitrage, what is the arbitrage gain or loss if you go from Hong Kong $ to Korean won to Singapore $ and back to Hong Kong, based on these quotes (rounded)?
a. Loss HK$ 1818

b. Gain HK$ 4545

c. Loss HK$ 5000

d. Loss HK$ 4545

Answer 1

1	Hong kong to korean	HK$10000
	Exchange rate ( Bank c)	korean won 30 - 32 per HK$
	use the rate	Bid rate
	Korean won	HK $ 100000* 30
		3,000,000.00
2	To convert korean won to Singapore $
	Exchange rate ( Bank A)	Korean won 100 - 110 per Singapore $
	Use the Rate	Ask Rate Korean won 110 per S$
	Singapore $	3000000/110
		27,272.73
3	To Convert Singapore $ to HongKong $
	Exchange Rate ( Bank B )	HK $ 3.50 - 3.60 per Singapore $
	Use the rate	Bid rate HK$ 3.5
	HongKong $	27272.73*3.5
		95,454.55
	Loss( HK $) =	95454.55 - 100000
		(4,545.45)	million

Answer is option D ) Loss HK $ 4545