As a trader in New York's financial district, you are interested in three currencies: US Dollars ($), Bezos Bucks (B), and Musk Melons (u). You have access to the following spot exchange rates. $0.50/ B $1.25/ u B 3/ u a) Does arbitrage exist? Compare the cross rate of Musk Melons to Bezos Bucks to their "actual" exchange rate in US Dollars to justify your answer. (Hint: Compare the given B/u rate to the B/u rate you would obtain using each currency's rate compared to S). b) Show how triangular arbitrage can be used to earn a profit. Assume that you are given $50 million to start with. c) Will you be able to make a profit from this exchange rate forever? Why or why not? (Explain the effect of this arbitrage on the foreign exchange market)
As a trader in New York's financial district, you are interested in three currencies: US Dollars ($), Bezos Bucks (B), and Musk Melons (u). You have access to the following spot exchange rates. $0.50/ B $1.25/ u B 3/ u a) Does arbitrage exist? Compare the cross rate of Musk Melons to Bezos Bucks to their "actual" exchange rate in US Dollars to justify your answer. (Hint: Compare the given B/u rate to the B/u rate you would obtain using each currency's rate compared to S). b) Show how triangular arbitrage can be used to earn a profit. Assume that you are given $50 million to start with. c) Will you be able to make a profit from this exchange rate forever? Why or why not? (Explain the effect of this arbitrage on the foreign exchange market)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:As a trader in New York's financial district, you are interested in three currencies:
US Dollars ($), Bezos Bucks (B), and Musk Melons (u). You have access to the
following spot exchange rates.
$0.50/ B
$1.25/ u
B 3/ µ
a) Does arbitrage exist? Compare the cross rate of Musk Melons to Bezos
Bucks to their "actual" exchange rate in US Dollars to justify your answer.
(Hint: Compare the given B/u rate to the B/u rate you would obtain using
each currency's rate compared to S).
b) Show how triangular arbitrage can be used to earn a profit. Assume that you
are given $50 million to start with.
c) Will you be able to make a profit from this exchange rate forever? Why or
why not? (Explain the effect of this arbitrage on the foreign exchange
market)
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