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)?

Answer 1

Answer-

In triangular arbitrage we should remember Up the bid and multiply and Down the ask and divide.

Given values

Bank A: Korean won 100 - 110 per Singapore $ [ Here bid is 100 and ask is 110]

Bank B: Hong Kong $ 3.50 – 3.60 per Singapore $

Bank C: Korean won 30 - 32 per Hong Kong $

Here we have the line of credit of Hong Kong $ 100000 million

Hong Kong $ to Korean won to Singapore $ and back to Hong Kong

Firstly we need to convert Hong Kong $ to Korean won

As per Bank C we are going Up so it is Up the bid and multiply and here bid value is 30 won / Hong kong $
= 100000 x 30 = 3000000 won

Next is Korean won to Singapore $
As per Bank A it is Down so it is Down the ask and divide and here ask value is 110 won / Singapore $
= 3000000 / 110 = 27272.727 Singapore $

Next is Singapore $ back to Hong Kong $
As per Bank B it s UP and hence it is Up the bid and multiply and here bid value is 3.50 $ Hong kong / $ Singapore

= 27272.727 x 3.50 = $ 95454.54 million Honk kong

Therefore the arbitrage loss =  $ 100000 m - $ 95454.54 = $ 4545.46 million

Arbitrage loss = Hong Kong $ 4545.46 million