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Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes: Swiss franc/dollar = SFr 1.5971/$ Australian dollar/U.S. dollar = A$ 1.8215/$ Australian dollar/Swiss franc
Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes: Swiss franc/dollar = SFr 1.5971/$ Australian dollar/U.S. dollar = A$ 1.8215/$ Australian dollar/Swiss franc = A$1.1444/SFr Ignoring transaction costs, does Doug Bernard have an arbitrage opportunity based on these quotes? If there is an arbitrage opportunity, what steps would he take to make an arbitrage profit, and how would he profit if he has $1.000.000 available for this purpose. Suppose you start with the cross-rate between A$ and SFr. Hint: First, calculate the implied or "no arbitrage" cross rate between AUD anil SFr. Then compare the "no arbitrage" cross rate with the quoted cross rate and determine which currency to buy (borrow) and which one to sell
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