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Cross Rates

The below answer is confusing me. Is there a better way to go about this problem? Thanks!

Austin notices that the foreign exchange market is not very liquid for the pair of INR/EUR. The spread quoted by the dealers is quite high, and the bid price is 80.14, and the ask price is 80.26. He is expecting the EUR to depreciate in the coming few months. So, he wants to take a position in the foreign exchange market accordingly. He finds out that the markets are very liquid for INR/USD and EUR/USD contracts. The bid-ask rate for INR/USD contract is 60.04 - 60.08. The bid-ask rate for EUR/USD pair is 0.7470-0.7486. So, he decides to take a position in the INR/USD contract using the cross trades.

What will be the total profit made by Austin by taking the cross trade position rather than directly investing in the INR/EUR exchange market? Assume that his trade size is very small and will not move the market. 

a) 0.2348 INR per EUR 

b) 0.1148 INR per EUR 

c) 0.0630 INR per EUR 

The given answer is c

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Start with EUR1.00:

  • EUR1.00 × INR80.14/EUR1.00 = INR80.1400
  • EUR1.00 × USD1.00/EUR0.7486 × INR60.04/USD1.00 = INR80.2030
  • INR80.2030 − INR80.1400 = INR0.0630

Simplify the complicated side; don't complify the simplicated side.

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Ahh that makes sense now. Thank you!

You’re quite welcome.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/