Question
Consider the following exchange rate quotes: Citibank quotes USD per Euro: USD 1.3297=1 EUR Barclays Bank quotes USD per pound sterling: USD 1.5585=1GBP Dresdner Bank
Consider the following exchange rate quotes:
Citibank quotes USD per Euro: USD 1.3297=1 EUR
Barclays Bank quotes USD per pound sterling: USD 1.5585=1GBP
Dresdner Bank quotes Euros per pound sterling: EUR 1.1722=1GBP
Evaluate the following triangular arbitrage opportunity:
1. A trader for Citibank starts with $1,000,000
2. She sells the USD to Barclays for GBP
3. She sells the GBP to Dresdner for Euros
4. She sells the Euros back to Citi for USD
Did the strategy profit? Remember, any deviation from the starting amount would be classified as an arbitrage profit.
Compute the percentage gain or loss on the strategy as follows: (ending USD-1,000,000)/1,000,000 x 100. Is it greater or less than 1%?
Draw a diagram of the triangle: and show the transactions at each point of the triangle.
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