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(Adam wanted) Forex Question?
“Adam” asked for Forex Questions. Here’s one for you…
Calculate the profit on a triangular arbitrage opportunity, given the following bid-ask quotes:
American bank offers:
Euro:USD 1.2000 -1.2050
GBP:USD 1.7950 – 1.800
British Bank offers:
GBP:Euro 1.5050 – 1.5070
SHOW YOUR WORK!
(BTW – I know how to get the proper answer – but, hey, you implied you wanted some “practice”.)
Edit: Joey – are you CFA? candidate?
I bet Adam can’t do it….
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LikeDislikeThanks E for doing as per my request, and I agree with above comment , Its goes above my head like a plane. I am just too beginer. LOL But I will try to learn those and it your question will help me. Thanks for your time.
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LikeDislikeAdam, if you are beginner how can you answer Forex questions? You can mislead some newcomers.
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LikeDislikeFirst you must calculate the implied GBP:euro bid-ask spread “offered” at Amer “A” bank. (Will use E for euro)
GBP:E bid = GBP:$ bid / E:$ ask = 1.7950 / 1.2050 = 1.48963
Next: compare ^ to British Bank “B”‘s spread of GBP:E 1.5050 – 1.5070
You’ll see that you can make a proift by coordinating an effective “Buy” GBPs at A’s Ask, and sell GBPs at B’s bid to receive a profit in Euros. As follows…
Sell enough Euros to A to produce the $1.80 you need to buy one GBP from A.
Therefore at $1.20 per Euro at A, to calc $1.80′s worth of Euros you need to sell 1.8 / 1.2 = 1.5 Euros
You’ve now sold 1.5 euros and received $1.80
Use the $1.80 to buy one GBP at Bank A
now sell the one GBP to Bank B and receive 1.5050 euros
use this money to cover (“repay”) the 1.5 euros you “sold” originally
you thus net 0.0050 euros per “single” transaction
This is a fine example of a riskless profit in triangular currency arbitrage. Not much profit for this “single” transaction, but throw a lot of money at it and you’ll see where currency traders can make a lot of riskless profit.
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