Space Arbitrage:

A Paris bank offers to both buy and sell pounds for 1.6205 euros per pound.

A London bank is willing to both buy and sell euros for 0.6281 pounds

per euro. Assume you are a large money center bank who can trade currency

with both the London and Paris banks. Suppose you have 100,000 pounds.

Determine a way to make a profit from this situation by converting the

pounds to euros and then back again.

1. When you convert the pounds to euros, how many euros will you receive?

2. When you convert the euros back to pounds, how many pounds will you

receive?

3. What will be the profit you make in pounds?

Triangular Arbitrage:

A Tokyo bank offers to sell euros at 125.50 yen per euro and buy

125.50 yen per euro. A Berlin bank offers to sell pounds at

1.5939 euros per pound and buy pounds at 1.5939 euros per pound.

A London bank offers to sell pounds at 203.15 yen per pound

and buy pounds at 203.15 yen per pound. Starting with 200,000 euros,

determine some way to make a profit.

4. What will be your profit in euros?

5. Along the way in the above transactions, you had to momentarily hold

pounds. How many pounds did you hold?

6. Along the way in the above transactions, you had to momentarily hold

yen. How many yen did you hold?