Suppose that ING Bank, HSBC Bank, and BNP Paribas provide the following quotes for the Russion ruble (RUB):

1. ING EUR/RUB 0.0112-35

2. HSBC EUR/RUB 0.0098-125

3. PNB EUR/RUB 0.0096-110

Questions

(1) Is there an arbitrage opportunity in these quotes?

Answer:

Choose one of the following answers: A, B, C or D

A = Between ING and HSBC

B = Between ING and PNB

C = Between HSBC and PNB

D = There are no arbitrage opportunities

(2) If there is an arbitrage opportunity in the quotes what is the profit a trader could make risk-free if she could borrow EUR 1 million?

Answer:

Choose one of the following answers: A, B, C or D

A = There are no arbitrage opportunities, so no risk-free profits

B = EUR 18,181.82

C = EUR 166,666.67

D = EUR 227,272.73

(3) If a trader wants to exchange EUR for RUB, which of the dealers offers the most attractive rate?

Answer:

Choose one of the following answers: A, B, or C

A = ING

B = HSBC

C = PNB

(4) If a trader wants to exchange RUB for EUR, which of the dealers offers the most attractive rate?

Answer:

Choose one of the following answers: A, B, or C

A = ING

B = HSBC

C = PNB

(5) As traders shop around or take advantage of arbitrage opportunities, what would likely happen to the ING's rates?

Answer:

Choose one of the following answers: A, B, or C

A = Bid rate would increase, Ask rate would increase

B = Bid rate would increase, Ask rate would decrease

C = Bid rate would decrease, Ask rate would decrease

(6) As traders shop around or take advantage of arbitrage opportunities, what would likely happen to the HSBC's rates?

Answer:

Choose one of the following answers: A, B, or C

A = Bid rate would increase, Ask rate would increase

B = Bid rate would increase, Ask rate would decrease

C = Bid rate would decrease, Ask rate would decrease

(7) As traders shop around or take advantage of arbitrage opportunities, what would likely happen to the PNB's rates?

Answer:

Choose one of the following answers: A, B, or C

A = Bid rate would increase, Ask rate would increase

B = Bid rate would increase, Ask rate would decrease

C = Bid rate would decrease, Ask rate would decrease