INTERNATIONAL FINANCE (BBCF3133/BBCF4073)

QUIZ 6
MARKET FOR FOREIGN EXCHANGE
Triangular Arbitrage

1. Given the following exchange rate in London and New York:

EUR/USD = 1.2000 (London)

EUR/CAD = 1.5000 (London)
USD/CAD = 1.2539 (New York)

i. Calculate if there is any arbitrage opportunities.

ii. Calculate the profit/ (loss) from the above triangular arbitrage assuming
your investment start with USD1,000,000.00.

i. USD = USD x EUR

CAD EUR CAD

=1 x 1.5000
1.2000

= 1.25 compared against USD/CAD in New York of 1.2539, the

difference indicates that there is arbitrage opportunities.

ii. USD EUR  CAD  USD

USD (÷1.2000) EUR (x1.5000) CAD (÷1.2539) USD

1,000,000.00 833,333.33 1,250,000.00 996,889.70

Start: 1,000,000.00
End: 996,889.70
Loss: (3,110.30)
USD (x1.2539) CAD (÷1.5000) EUR (x1.2500) USD
1,000,000.00 1,253,900 835,933.33 1,044,916.67

Start: 1,000,000.00
End: 1,044,916.67
Profit: 44,916.67

1. In order for traders to do triangular arbitrage, the exchange rate must

not be the same in two markets.
2. In order for you to make profit, the triangular arbitrage must be done
counter clockwise from USD EUR  CAD  USD.

2. Given the following exchange rate in New York and Canberra:

AUD / USD = 0.7926 (Canberra)

AUD / INR = 51.0021 (Canberra)
USD / INR = 64.3300 (New York)

i. Calculate if there is any arbitrage opportunities.

ii. Calculate the profit/ (loss) from the above triangular arbitrage
assuming your investment start with USD5,000,000.00.