USD:CAD = 1.2138-1.2259 USD:REAL = 2.3844-2.4082 Dealer’s quote (Bid only): REAL:CAD = 0.5250 Initial investment = USD $1,000,000 What is the triangular arbitrage progit?
hummm, i dont feel like doing this the right way, so i am going to show you the “gay” way okay so i start with 1,000,000 USD at this point there are two things I can do with it, buy cad, or buy real let us try to buy real i get 2.3844 real for each usd so thats 2.3844*1000,000=2384400 real now I got to go to CAD 2384400*0.5250=1,251,810 CAD now i wana go back to $ 1251810/1.2258=1,021,218 you gain 21,218 ------------------------ in a typical questions like this where you are given both bid and ask the “gay” way is to try both ways, one will make money, one will lose money in this case , had you started buy going to cad, you would have hit a block because you do not have the ask that will allow you to go from cad to real…so it is obvious that the other way if the way that you can use to make arbitrage profit… the biggest problem is to know which rates to use untill you become profficient at it, remmber this, always use the rate that puts you at a disadvatage, after all the dealer wants to make money for if you are looking at 1.410 and 1.415 (bid and ask) and you are not sure which to use try both, the ones that gives you less of the “ending” currency is the correct one after all a dealer wont buy for high and sell for low… all my explanations tend to be messy, cause i am short on time, never the less if you suffer with them, they have some value regards
yeh i also forgot to say by “gay” way i ment that there are easier ways to go about this while this is slightly longer logic, it requires less understanding and allows you to move on to study other things so i suggest you use it untill you find an easier way to think about it, i know of a couple other ones but they tend to be harder to explain
Thanks