What price will eliminate triangular arbitrage

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Reference no: EM131462331

Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting €0.855/$1.00 and Credit Suisse is offering SF1.1825/$1.00. You learn that UBS is making a direct market between the Swiss franc and the euro, with a current €/SF quote of € 0.754/SF. 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?

Reference no: EM131462331

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