Homework #1 (Triangular Arbitrage)

Homework #1 (Triangular Arbitrage)Exercise 1 (Triangular Arbitrage With Bid-Ask)

Exercise 1A: Euros to dollars to pounds and then back to eurosCitibanks quote: $1.5445 1.5460 /

Barclays quote: $1.9443 1.9453 /

Dresdners quote: 1.2789 1.2799 /

(1) Trader starts with 1 million & sells them to buy $ from Citibank at the bid rate of $1.5445 / & receives = ( 1 mill x $1.5445 / ) = $1,544,500 (multiply here). (Here is reference, client is selling and so dealer buys at bid)(2) He then sells these $ to buy at Barclay @ the ask rate of $1.9453 / (divide here) and receives = 793,964.94 ( is reference, client buys ; dealer sells at ask)(3) He then simultaneously sells these buy at Dresdner @ the bid rate of 1.2789 / and receives 1,015,401.80 (multiple here), which clearly shows a profit to the trader. (Here is reference, client sells and dealer buys at bid).ARBITRAGE PROFIT 15,401.80.Exercise 1B: Euros to pounds to dollars and then back to eurosCitibanks quote: $1.5445 1.5460 /

Barclays quote: $1.9443 1.9453 /

Dresdners quote: 1.2789 1.2799 /

(1) Trader starts with 1 million & sells them to buy at Dresdner @ the ask rate of 1.2799 / & receives = ( 1 mill / 1.2799 / ) = 781,311.04 (divide here). (Here is reference, client is buying and so dealer sells at ask)(2) He then sells these to buy $ at Barclay @ the bid rate of $1.9443 / (multiply here) and receives = $1,519,103.10 ( is reference, client sells ; dealer buys at bid)(3) He then simultaneously sells these $ to buy at Citibank @ the ask rate of $1.5460 / and receives 982,602.23 (divide here), which clearly shows a loss to the trader. (Here is reference, client buys and dealer sells at ask).

NO ARBITRAGE PROFIT HERE.