What price will eliminate triangular arbitrage

Reference no: EM133269675

Question - Assume you are a trader with JP Morgan. From the quote screen on your computer terminal, you notice that Bank A is quoting €0.8354/$1.00 and Bank B is offering SF1.0913/$1.00. You learn that Bank C is making a direct market between the Swiss franc and the euro, with a current €/SF quote of 0.7812 (= €0.7812/SF).

(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 $1 million with which to conduct the arbitrage. How much is your dollar-based profit?

(2) What €/SF price will eliminate triangular arbitrage?

(3) What happens if you initially sell dollars for euros?

Reference no: EM133269675

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