Currency Conversion Problem

1. $3,000,000 can be converted into ??? British pounds

2. SF1,500,000 can be into ???? USD

3. MP 600,000 can be converted into ??? Swiss Francs

4a. How many SF does it take to buy 1 BP ?

4b. How many BP does it take to buy 1 SF?

Bid-Ask Spread Problem

The following table presents bid and ask quotes for BP from currency dealers in New York and London:

1. Assume that you dealt with the New York currency dealer only. You converted $100,000 into pounds, and immediately afterwards sold the pounds for dollars. Estimate the dollar amount you lost in this round trip transaction.

2. Assume that you dealt with the London currency dealer only. What is the percentage bid-ask spread for this dealer?

3. Which dealer (s) would you buy from, and sell to ?

Triangular Arbitrage

The following exchange rates are available to you.

Swiss franc/dollar                SFr1.5971/$

Australian dollar/U.S. dollar       A$1.8215/$

Australian dollar/ Swiss franc      A$1.1450/SFr

Assume you have an initial $10 million.

a. Can you make a profitvia triangular arbitrage? Explain.

b. If so, show steps andcalculate the amount of profit in U.S. dollars.

Solution: Currency Conversion Problem

1. 3,000,000 x0.75 = BP 2,250,000

2. 1,500,000 x0.50 = $ 750,000

3. MP 600,000 /10 = $ 60,000

$ 60,000 /0.50 = SF 120,000

4a. BPDQ = 1 /0.75 = 1.33 ; SFDQ = 0.50

      BPDQ / SFDQ =1.33 / 0.50 = SF 2.67

4b. SFDQ / BPDQ =0.50/1.33 = BP 0.375

Bid-Ask Spread Problem

1. $100,000 /1.68= BP 59,523.81; BP 59,523.81 * 1.58 = $94,047.62

    $94,047.62 -$100,000 = $5,952.38

2.  [(1.70 - 1.65)/ 1.70] * 100 = 2.94%

3. Buy from the lowest ask = New York

    Sell to the highest bid = London

Triangular Arbitrage

ANS:

a.Since S^SFr/$ S^$/A$S^A$/SFr = 1.5971 x 1/1.8215x 1.1450 = 1.00394 > 1, there is an arbitrage opportunity.

b.Steps

① Sell $ to buy SFr: 10 million x SFr 1.5971/$= SFr15.971m

② Sell SFr to buy A$: SFr15.971m xA$1.1450/SFr = A$18.286795m

③ Sell A$ to buy $: A$18.286795m÷A$1.8215/$ =$10.0394153m

Profit (ignoring transaction fees）:

  $10.0394153 – $10 = $0.0394153 million =$39,415.3