Jennifer Nance has recently been hired as an analyst at the Central City Bank in the currency trading department. Nance, who recently graduated with a degree in economics, will be working with other analysts to determine if there are profit opportunities in the foreign exchange market. Nance has the following information available on currency spot exchange rates: Euros are trading at $0.9905 in New York. Euros are trading at 9.8674 Mexican Pesos (MXN) in Berne. U.S. Dollars are trading at 9.75 Mexican Pesos in Mexico City. Nance is asked to determine if a profitable arbitrage opportunity exists, and if so, to determine the amount of profit in percent. A) Yes, a 1.3% arbitrage profit is available. B) Yes, a 1.2% arbitrage profit is available. C) Yes, a 2.18% arbitrage profit is available.
I’m horrible at this. However, I’ll give it a try. I think the answer is C.
C is the answer
v v easy . Use dimensional math and its a no brainer MXP/USD = (MXP/EUR ) / ( USD/EUR) and that’s it . Fill in the values and get the arb free MXP/USD on the left . Compare it to the quote and see if over/under priced , by what %
Not to be a Valley Girl, but OMG! That’s way easier. Thanks!
Yes, it’s C. Although Schweser calculates the cross rate MXN/EUR because it “assumes” the rates versus the $ are correct. I didn’t know about that tacit assumption. Although it apparently didn’t affect the answer since janakisri got it correct.
So i tried janakisri’s example but switched around the terms. VERY helpful MP/EURo = (MP/dollar)/(EURO/dollar) 9.8674 = 9.75/1.00959 9.8674 = 9.65738 the math yields a -2.18% it doesn’t matter if the sign is positive or negative…if it doesn’t = 0, there is arbitrage??? I havent even read this section yet but that seems logical. thanks for that moment of clarity
C is the answer.