Question
Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting 0.7627/$1.00 and
Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting 0.7627/$1.00 and Credit Suisse is offering CHF1.1806/$1.00.You learn that UBS is making a direct market between the Swiss franc (CHF) and the euro, with a current /CHF quote of 0.6395. Assume you have $5,000,000 with which to conduct the arbitrage.
(a) Show how you can make a triangular arbitrage profit by trading at these prices. Please list your strategies and determine the triangular arbitrage profit. (Ignore bid-ask spreads for this problem.) (12%)(b) What happens if you initially sell dollars for Swiss francs? (10%)(c) What /CHF price will eliminate triangular arbitrage? (5%)
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