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Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes: Swiss franc/dollar = SFr1.5971/$ Australian dollar/U.S. dollar = A$1.8215/$ Australian dollar/Swiss franc = A$1.1440/SFr
Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes: Swiss franc/dollar = SFr1.5971/$ Australian dollar/U.S. dollar = A$1.8215/$ Australian dollar/Swiss franc = A$1.1440/SFr Ignoring transaction costs, how would he profit if he has $1,000,000 available for this purpose. Hint: from the first two exchange rates, we know A$1.8215 = SFr 1.5971 and they are both equal to $1. Therefore, one SFr is equal to (1.8215/1.5971) A$, which suggest the exchange rate should be A$1.1405/SFr. Compare this exchange to the third exchange rate, we know SFr is overvalued. We need to convert us dollars into SFr and then into A$ and then back to US dollars
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