Q.1 Riskless profit on the Swiss franc. The following exchange rates are avaliab

Question

Q.1 Riskless profit on the Swiss franc. The following exchange rates are avaliable to you.(you can buy or ssell at the started rates.)

Mt Fuji Bank   ¥120.00/A$

Mt Rushmore Bank SF1.6000/A$

Mt Blanc Bank ¥80.00/SF

Assume that you have an initial SF 10,000,000. Can you make a profit via triangular arbitrage? If so, show steps and calculate the amount of profit in Swiss francs.

Q.2 Australian-euro arbitrage. A corporate treasury with operations in Sydney simultaneously calls Westpac Bank in Sydney and Barclays in London. The two banks give the following quotes at the same time on euro:

Westpac Sydney: A$1.1840-60/€ Barclays London A$1.1830-50/€

Expain, using 1 million or its euro equivalent, how the corporate treasury could make geographical arbitrage profit with the two exchange rate quotes.

Explanation / Answer

Answer: Only to the first question:

Currency available: SF 10,000,000

Step 1: Convert SF 10,000,000 to Yen at the rate of Yen 80.00 per SF.

So Now SF 10,000,000*Yen 80/SF = Yen 800,000,000

Step 2: Convert Yen 800,000,000 to A$ at the rate of Yen 120/A$.

So Yen 800,000,000*{1/( ¥120/A$)} = Yen 800,000,000*A$/¥120 = A$ 6,666,666.67

Step 3: Convert A$ 6,666,666.67 back to SF at the rate of SF1.6000/A$ = SF10,666,666.67

So the profit in swiss francs is SF10,666,666.67 - SF10,000,000 = SF 666,666.67

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