Question 4: Assume you are a trader in foreign currencies and you look for arbitrage. From the
Question:
Question 4: Assume you are a trader in foreign currencies and you look for arbitrage. From the quote screen on your computer terminal, you observe the exchange rate quotations below. (Numbers should be rounded to 4 decimal places. Please note that your answers will be worthy zero mark if they do not include currency symbols, , $, .)
Bank Quotations | Rate |
Citi Bank : | $1.8403/ |
UBS : | $1.3225/ |
Barclays Bank : | 1.3647/ |
a. Explain what a triangular arbitrage is. What is a condition that will give rise to a triangular arbitrage opportunity? (1.5 marks)
b. What / price will eliminate triangular arbitrage? (1 mark)
c. How you can make a triangular arbitrage profit by trading at these prices? What is the profit? Explain and discuss your calculations. (4 marks)