Question
A corporate treasury working out of Austria with operations in New York corresponds with two banks simultaneously Well Fargo (NYSE:WFC) in New York City and
A corporate treasury working out of Austria with operations in New York corresponds with two banks simultaneously Well Fargo (NYSE:WFC) in New York City and Deutsche Bank (NYSE:DB) in Frankfurt. The banks give the following bid and ask quotes for the euro. Well Fargo NYC quotes for euro Deutsche Bank Frankfurt quotes for euro $1.1872/ (bid) $1.1884/ (ask) $1.1843/ (bid) $1.1861/ (ask)
(a) How many dollars is Deutsche Bank offering in exchange for 3,000 euros?
(b) How many euros is Wells Fargo NYC offering in exchange for 7,000 dollars?
(c) Using $1 million (or its euro equivalent), describe what actions could the corporate treasury take in order to make an arbitrage profit facing these quotes.
(d) Suppose the banks update their quotes to the following: Well Fargo NYC quotes for euro Deutsche Bank Frankfurt quotes for euro $1.1862/ (bid) $1.1881/ (ask) $1.1846/ (bid) $1.1866/ (ask) Is there still an arbitrage opportunity? Why or why not?
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