Question

Bank A quotes a bid rate of $0.300 and an ask rate of $0.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $0.306 and an ask rate of $0.310 for the ringgit. What will be the profit for an investor that has $500,000 available to conduct locational arbitrage

Answer 1

Answer: $1639.3

Explanation:

From the question, we are informed that Bank A quotes a bid rate of $0.300 and an ask rate of $0.305 for the Malaysian ringgit (MYR) and that bank B quotes a bid rate of $0.306 and an ask rate of $0.310 for the ringgit.

The profit for an investor that has $500,000 available to conduct locational arbitrage goes thus:

Purchasing Malaysian ringgit (MYR) from bank A at the ask rate will be:

= $500,000/$0.305

= 1,639,344.3

Selling the Malaysian ringgit (MYR) at bank B based on the ask rate will be:

= 1,639,344.3 × 0.306

= $501,639.3

The profit for an investor that has $500,000 available to conduct locational arbitrage will be:

= $501,639.3 - $500,000

= $1639.3