Question
The following exchange rates are quoted simultaneously in Johannesburg, Frankfurt, Singapore and Paris: Johannesburg: USD/ZAR 18.8300 Frankfurt: GBP/USD 1.2550 Singapore: ZAR/SGD 0.0725 Paris: SGD/USD 0.7255
The following exchange rates are quoted simultaneously in Johannesburg, Frankfurt, Singapore and Paris:
Johannesburg: USD/ZAR 18.8300
Frankfurt: GBP/USD 1.2550
Singapore: ZAR/SGD 0.0725
Paris: SGD/USD 0.7255
Which is us ed as the base currency and will the base currency make any differences?
a- Calculate in detail all the possible cross rates in the above and then indicate if there is a possibility for three-point arbitrage.
b-Suppose Jay have R1 million to perform an arbitrage trade. Also, suppose the transaction cost for executing all the arbitrage trades is R1550. If the transaction costs are included, is there still a profitable arbitrage sequence available? Prove the answer by calculating the profit (or loss) earned from arbitrage if Jay has ZAR 1 million to use.
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Foundations of Finance The Logic and Practice of Financial Management
Authors: Arthur J. Keown, John D. Martin, J. William Petty
8th edition
132994879, 978-0132994873
