PPT FOREIGN EXCHANGE

ARBITRAGE PROBLEM
Paper MB-305-1:Discipline Specific 2019
Sub:IF Part-B Marks:12 Q.No.7(a)
• Q.7(a)The following exchange rates are
prevailing in different markets.
Mumbai Rs.72.4321 per U.S. Dollar
London Rs. 103.4567 per British Pound
New York 1.4334 dollars per Pound
Work out arbitrage gains possible, assuming no
transaction costs.
• Solution.
• From the given data a triangular currency
arbitrage is possible since the dollar/pound rate
found by using the rates at London and
Mumbai is different from that of New York.
The following sequence will result into a gain:
• i. Use $ 1000 to buy rupee in Mumbai. The
arbitrageur would get Rs. 72432 (Rs.
72.4321x1000)
• ii. Sell Rs. 72432 in London to get British
Pound 700 (724321/103.4567)
• iii. Sell British Pound 700 in New York to get
$ 1003.38 (=700 x 1.4334)
• Net Gain 3.38(1003.38-1000)
• Question: Are there any arbitrage gains
possible from the data given below? Assume
there are no transaction costs.
Rs.55,500 = < 1 in London
Rs.35.625 = $ 1 in Delhi
$ 1.5820 = 1 Pound in New York
• Solution: From the given data, a triangular
currency arbitrage is possible since the
dollar/pound rate found by using the rates at
London and Delhi is different from that of
New York. The following sequence will result
into a gain:
• i. Use $ 1000 to buy rupees in Delhi. The
arbitrageur would get Rs. 35.625 (=1000 x
35.625)
• ii. Sell Rs. 35.625 in London to get Pound
641.89 (=35.625/55.500)
• iii. Sell Pound 641.89 in New York to get $
1015.47 (=641.89 x 1.520)
• iv. Net Profit is $ 15.47 (=1015.47-1000)