USD:EUR 1.39 1.395 JPY:USD 82.9 82.945 EUR:JPY 115 115.1 Given the quotes, is there an opportunity and if John invests $5,000,000, is there an expected profit? A. No. B. Yes, a profit of $5,500. C. Yes, a profit of $6,121.
Ok I must hav forgotten the whole up the bid down the ask thing, because I just can’t see how they got the answer.
We have EUR/ USD, JPY/EUR, and USD/ JPY, so going USD to EUR to JPY to USD we should be using the bid each time so 1/1.39 x 115 x 1/ 82.9 right? Or have I completely forgotten how to do these?
Speaking on this topic-and dont mean to hijack the thread (thought it was about my question initially)… When faced with a Triangle Arbitrage questions, what is the easier/best way to tell right currency to start with?
Matori> I’d go one round in the triangle in any direction (e.g. USD to JPY to EUR to USD). If I end up less money, go in the other direction. If I end up same amount of money, then, no arbitrage opportunity is present
I’m adjusting the rates (hopefully correctly) and attempts the question:
USD/EUR 1.39 1.395
JPY/USD 82.9 82.945
JPY/EUR 115 115.1
MissCleo, I can relate to bid/ask problem, I’m bad with bid and ask terms, but always remember that FX always gives you the lousier rates. I find that more helpful than memorizing ask, bid then ask etc. =)
John goes round the triangle:
a) John has 5 million USD. He goes to Japan and changes his money:
5000000 * (82.9 or 82.945?)
FX gives the lousier rate: 5000000* 82.9 = 414,500,000 JPY
b) John then goes to Europe.
414,500,000 JPY / (115 or 115.1?)
FX gives the lousier rate: 414.5 million JPY / 115.1 = 3.601 million EUR
c) John returns to USA
3.601 million EUR * (1.39 or 1.395)
FX gives the lousier rate: 3.601 million * 1.39 = 5.0054 million USD
Answer: B. John became richer by approx 5000 USD for travelling. =)