As a foreign exchange trader, you see the following quotes for Canadian dollars (CAD), U.S. dollars (USD), and Mexican pesos (MXN):
USD0.7047/CAD MXN6.4390/CAD MXN8.7535/USD
Is there an arbitrage opportunity, and if so, how would you exploit it?
The direct quote for the cross-rate of MXN6.4390/CAD should equal the implied cross-rate using the dollar as an intermediary currency; otherwise there exists a triangular arbitrage opportunity. The indirect cross rate is
MXN8.7535/USD USD0.7047/CAD = MXN6.1686/CAD
This indirect cross rate is less than the direct quote so there is an arbitrage opportunity to exploit between the three currencies. In this situation, buying the CAD with MXN by first buying USD with MXN and then buying the CAD with the USD and finally selling that amount of CAD directly for MXN would make a profit because we would be buying the CAD at a low MXN price and selling the CAD at a high MXN price.
You might also like to view...
A testator may revoke a will by intentionally tearing it
Indicate whether the statement is true or false
During the ____ stage of the problem-solving process, a course of action is selected.
A. selection B. choice C. implementation D. design
_____ are senior, unsecured, unsubordinated debt securities issued by an underwriting bank.
A. Mutual funds B. Exchange traded notes C. Corporate bonds D. Collateral debt obligations E. Treasury bills
You make your first purchase on your new credit card at the grocery store totaling $300. If you paid the $10 minimum payment at 19.99% APR, how long would you be paying for this grocery bill?
A) 24.53 years B) 3 months C) 3 years D) 24.53 months E) 24.53 weeks