Assume that you are a trader with D Bank. From the quote screen on your computer terminal, you

notice that Zbank is quoting Euro $0\mathrm{.}7627/$US$$,$ and Sbank is offering SFr$1\mathrm{.}1806/$US$$.$ You learn

that HSBC is making a direct quote of $0\mathrm{.}6395.$ Show how you can make a triangular arbitrage profit

by trading at these prices. Ignore bid$-$ask spreads for this problem. Assume you have $$5,000,000$

with which to conduct the arbitrage.

a$)$ What is the implied Euro$/$SFr cross$-$rate derived from the dollar exchange rates quoted by Zbank

and Sbank?

b$)$ Describe the sequence of transactions you should undertake to earn a triangular arbitrage profit.

What is your triangular arbitrage profit?

c$)$ What happens if you initially sell dollars for Swiss francs?

d$)$ What is the Euro$/$SFr price will eliminate triangular arbitrage?