Did Schweser screw up? Why, when converting from pounds to dollars in the first question they use the ask price and in the second one they use the bid price? Donna Ackerman, CFA, is an analyst in the currency trading department at State Bank. Ackerman is training a new hire, Fred Bos, a recent college graduate with a BA in economics. Ackerman and Bos have the following information available to them: Spot Rates Bid Price Ask Price Euro/US$ 1.0000 1.0015 British Pound/US$ ₤2.0000 ₤2.0100 Ackerman and Bos are interested in pursuing profitable arbitrage opportunities for State Bank. Using the appropriate bid or ask rates for the Euro/US$ and the British pound/US$, and assuming the Euro/British pound rate is 0.4000/₤, what will be the profits from triangular arbitrage, starting with $1,000? A) $250. B) $243.78. C) $1,250. D) $0. Your answer: A was incorrect. The correct answer was B) $243.78. Start with $1,000. Use the $1,000 to buy euros (1,000 × 1.000/) = 1,000. Use the 1,000 to buy sterling (1,000 / 0.4000/₤) = ₤2,500. Use the ₤2,500 to buy dollars (₤2,500 / ₤2.0100/$) = $1,243.78. Arbitrage profit = $1,243.78 − $1,000 = $243.78. -------------------------------------------------------------------------------- Ackerman and Bos are asked to consider how transaction costs might affect an arbitrage opportunity. Starting with 1,000, use only the appropriate bid rates for the Euro/US and the British pound/US$, assume the Euro/British pound rate is 0.4000/₤, and assume transaction costs are 1.0% per transaction. What will be the profits from triangular arbitrage? A) $212.87. B) $247.50. C) $245.02. D) $242.57. Your answer: B was incorrect. The correct answer was A) $212.87. Start with $1,000. Use the $1,000 to buy ($1,000 × 1.000/₤)(1 − 0.01) = 990.00. Use the 990 to buy (990.00 / 0.4000/₤)(1 − 0.01) = ₤2,450.25. Use the ₤2,450.25 to buy (₤2,450.25 / ₤2.00/)(1 − 0.01) = $1,212.87. Arbitrage profit = $1,212.87 − $1,000 = $212.87.
formatting is screwed
is jt not because of the question itself ? q1: “Using the appropriate bid or ask rates” q2: “Starting with $1,000, use only the appropriate bid rates”