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In: Finance

Inspired by his recent trip to the Halong Bay (in Vietnam) and Preah Vihear Temple (in...

Inspired by his recent trip to the Halong Bay (in Vietnam) and Preah Vihear Temple (in Cambodia), Citibank trader Eric Loepp wonders if he can make an intermarket arbitrage profit using Cambodian riel and Vietnamese dong. He works on the Korean desk so his primary currency is wrong. He has ₩100,000,000 to work with so he gathers the following quotes: Citibank quotes Cambodian riel per Korean Wong: CMR 1.9324 = KWG 1.00

National Bank of Vietnam quotes Cambodian riel per Vietnamese Dong: CMR 2.7506 = VDG 1.00

Nomura quotes Vietnamese Dong per Korean Wong: VDG 0.3781 = KWG 1.00

With these quotes, is there an arbitrage profit opportunity, how do we know? If so, what is his profit in wrong?

Now, in response to Eric’s trades, the banks update their quotes. If you also trade in these same currencies, can you make an arbitrage profit with the new quotes listed below? If you also have ₩100,000,000 to trade what is your profit from the trade? What is your profit in dollars if the current ₩ /$ quote by Citibank is 840 ₩ /$?

Citibank quotes Cambodian riel per Korean Wong: CMR 1.7648 = KWG 1.00

National Bank of Vietnam quotes Cambodian riel per Vietnamese Dong: CMR 2.9819 = VDG 1.00

Nomura quotes Vietnamese Dong per Korean Wong: VDG 0.5992 = KWG 1.00

Solutions

Expert Solution

Citi Bank Quotes
1 KWG = 1.9324 CMR
Money Available KWG         10,00,00,000
CMR available         19,32,40,000
National Bank of Vietnam quotes
Cambodian riel per Vietnamese Dong: CMR 2.7506 = VDG 1.00
With CMR available we can buy Vietnamese Dong (VDG)
          7,02,53,763
and Nomura quotes
Vietnamese Dong per Korean Wong: VDG 0.3781 = KWG 1.00
With VDG available he can buy Korean Wong (KWG)
        18,58,07,360
Profit in arbitrage           8,58,07,360
Quote KWG / USD 840
Currency Available KWG         10,00,00,000
Citibank quotes CMR /KWG 1.7648
Total CMR available         17,64,80,000
National Bank of Vietnam quotes
CMR/VDG 2.9819
Total VDG available           5,91,83,742
Nomura quotes VDG/KWG 0.5992
Total KWG available           9,87,71,265
Loss             -12,28,735
Loss in USD               -1,462.78

jeff jeffy answered 1 year ago
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