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Eliminate triangular arbitrage

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Problem: Assume you are a trader with BNP Paribas. From the quote screen on your computer terminal, you notice that Santander is quoting US dollars in terms of euro at €0.7859/$1.00 and Barclays is offering pounds in terms of euro at €0.7529/£1.00. You learn that HSBC is making a direct market between dollars and pound, with a current £/$ quote of £0.9701 for $1.

Required:

1. Show how you can make a triangular arbitrage profit by trading at these prices. (Ignore bid-ask spreads for this problem.) Assume you have €10,000,000 with which to conduct the arbitrage.

2. What £/$ price will eliminate triangular arbitrage?

Reference no: EM132433990

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