6) Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting €0.7627/$1.00 and Credit Suisse is offering SF1.1806/$1.00. You learn that UBS is making a direct market between the Swiss franc and the euro, with a current €/SF quote of .6395. Show how you can make a triangular arbitrage profit by trading at these prices. (Ignore bid-ask spreads for this problem.) Assume you have $5,000,000 with which to conduct the arbitrage. What happens if you initially sell dollars for Swiss francs? What €/SF price will eliminate triangular arbitrage?
6) Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting €0.7627/$1.00 and Credit Suisse is offering SF1.1806/$1.00. You learn that UBS is making a direct market between the Swiss franc and the euro, with a current €/SF quote of .6395. Show how you can make a triangular arbitrage profit by trading at these prices. (Ignore bid-ask spreads for this problem.) Assume you have $5,000,000 with which to conduct the arbitrage. What happens if you initially sell dollars for Swiss francs? What €/SF price will eliminate triangular arbitrage?
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:6) Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you
notice that Dresdner Bank is quoting €0.7627/$1.00 and Credit Suisse is offering SF1.1806/$1.00. You
learn that UBS is making a direct market between the Swiss franc and the euro, with a current €/SF quote
of .6395. Show how you can make a triangular arbitrage profit by trading at these prices. (Ignore bid-ask
spreads for this problem.) Assume you have $5,000,000 with which to conduct the arbitrage. What
happens if you initially sell dollars for Swiss francs? What €/SF price will eliminate triangular arbitrage?
Expert Solution
Step 1
STEP 1
Arbitrage
The practice of simultaneously purchasing and selling an item on various platforms, exchanges, or locations in order to profit from the price difference is known as arbitrage (usually small in percentage terms).
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