If I start with Euro 1, how will i be able to end up with profit of euro 0.005 as mentioned in CFAI book. However please explain with other way, not the way it is explained in the CFAI book.Thanks in advance.
Hi Join Me,
Let’s assume you are able to get the resulting cross rate quote by the American Bank of
American Bank: GBP:EUR = 1.4896 - 1.5000
With American Bank, (I can’t handle all the bid/ask terms, but remember FX always gives you the lousier rate), I need pay 1.5 Eur to get 1 GBP, but I only get 1.4896 Eur from 1 GBP.
What is British Bank offering? With British Bank GBP:EUR = 1.5050 - 1.5070 :
I need pay 1.5070 EUR to get 1 GBP (Not a good deal. I need to pay only 1.5 EUR to get 1 GBP with American Bank)
Or I get 1.5050 EUR from 1 GBP (Good deal! I get only 1.4896 EUR from 1 GBP with American Bank)
Let’s grab the good deal! Don’t wait!
Borrow 1 GBP from your friend now and get 1.5050 EUR
You ought to return 1 GBP to your friend. So our target is to raise 1 GBP
According to American Bank:
To raise 1 GBP, we need 1.8 USD. Nope, we don’t have USD either.
To raise 1.8 USD, we need 1.8/1.2 = 1.5 EUR
We have more than enough to pay for 1.5EUR since we have grabbed the good deal by using our friend’s 1 GBP to get 1.5050 EUR
Pay your friend back and you have a profit of 0.005 EUR.
Hope this helps!
(note: I don’t think we can start with 1 EUR as you’ve requested, and end up with 0.005 EUR, as the question revolved around 1 GBP, which is different in value to 1 EUR, right?) =)
I was getting wrong only at 1.8/1.2 = 1.5 Euro, Now I understood…
However Thanks once again KYH