From the solution, I don’t understand why 1,000 Euro can be converted into 2,500 Sterling. Please help! 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) $1,250. C) $243.78. D) $0. Your answer: A was incorrect. The correct answer was C) $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.
euro/gbp =0.4 that means that 1 gbp buys 0.4 euro that 1 euro buys 1/0.4=2.5 gbp the think is that this example is not realistic at all
Thanks florinpop. Not only unrealistic but also wrong. They have 1USD for 1 Euro (USD = Euro), then 1 pound equals to 2 USD yet also equals to 0.4xEuro.