I have research this, and am still confused. When do you multiply and divide ? How do you find the ask and bid side…reference ,example 4 on pg 560 CFAI. I am having a hard time understanding this example, think am fried. hook me up pls.
American Bank Given quotes E:D = 1.2 - 1.2050 P:D = 1.7950 - 1.8 London Bank Given quotes P:E = 1.5050 - 1.5070 Stool softener laxative (forget the base: counter) American Bank Given quotes D/E = 1.2 - 1.2050 i.e E/D = 0.829875 - 0.833333 D/P = 1.7950 - 1.8 London Bank Given quotes E/P = 1.5050 - 1.5070 Basic elementry maths (implicit) E/P(bid) = E/D(bid) * D/P(bid)= 0.829875*1.7950 = 1.489625625 (implicit) E/P(ask) = E/D(ask) * D/P(ask) = 0.833333*1.8 = 1.4999994 So (implicit) E/P = 1.489625625 - 1.4999994 i.e a more confusing way of writing it would be (implicit) P:E = 1.489625625 - 1.4999994 . . . . Hope you can take it from there to calculate Arbitrage profilt?
Pac…I get the triangular arbitrage, and how to calcualate profit…it is the cross rates that are confusing me at this point. I will look into it more 2morrow. I understand when it is same base currencies, you divide, and when base currencies are different, you multiply…but this is not proving to be correct all the time, this is where am confused.
23adam - just in case you did not see the CFAI errata for this problem. “In Example 4 (p. 560), the second line of Forex quotes should be £:$ instead of £:€. In the last paragraph of that Example, net profit should be 0.005 euro instead of 0.05”
swap…you are the man…thanks…no I did not see the errata. All this now makes sense. thanks again.