1 unit of Currency A costs 0.201 units of Currency B, 1 unit of Currency B costs 3.94 units of Currency C, and 1 unit of Currency A costs 0.798 units of Currency C. Assume that you are starting out with 1,000,000 units of Currency A and that there are no transaction costs. How much money will you make in one set of triangular arbitrage transactions? Round to the nearest unit of Currency A.
1 unit of Currency A costs 0.201 units of Currency B, 1 unit of Currency B costs 3.94 units of Currency C, and 1 unit of Currency A costs 0.798 units of Currency C. Assume that you are starting out with 1,000,000 units of Currency A and that there are no transaction costs. How much money will you make in one set of triangular arbitrage transactions? Round to the nearest unit of Currency A.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:1 unit of Currency A costs 0.201 units of Currency B, 1 unit of Currency B costs 3.94 units of
Currency C, and 1 unit of Currency A costs 0.798 units of Currency C. Assume that you are
starting out with 1,000,000 units of Currency A and that there are no transaction costs. How much
money will you make in one set of triangular arbitrage transactions? Round to the nearest unit of
Currency A.
Answer:
x
Take any two of those exchange rates and use algebra to figure out what the third one should be.
Then use (Real - Should)/Should to find the amount by which that currency is mispriced. If it's
overpriced, then the percentage by which it's overpriced is equal to the percentage gain you'll
make doing one set of arbitrage trades. If it's underpriced, then you'll have to find out how much
the other currency is overpriced and apply that percentage to 1,000,000 units of Currency A to get
your arbitrage gain. To check your work, you may want to then work out the actual trades on paper
to see if you come up with the same answer.
The correct answer is: 7652
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