Answer:
Given $1 million and the following quotes:
Bank C - $0.7551-61/€
Bank B - $0.7545-75/€
There are two different arbitrage strategies that can be attempted. The first is to buy euros from bank B, and then sell them to bank C:
Buy euros Bank B:
Euros to be bought = $1,000,000 x Euro / $ 0.7575
Euros to be bought = 1,320,132.01 Euros
Sell euros Bank C:
Euros to be sold = 1,320,132.01 euros x $0.7551 / Euro
Euros to be sold = $996,831.68
The profit/loss can be calculated by subtracting the original starting amount of dollars by the post-arbitrage amount:
Profit/loss = $996,831.68 - $1,000,000
Profit/loss = -$3,168.32
The second strategy involves buy euros from bank C and selling them to bank B: Buy euros Bank C:
Euros to be bought = $1,000,000 x Euro / $ 0.7561
Euros to be bought = 1,322,576.38 Euros
Sell euros Bank B:
Euros to be sold = 1,322,576.38 euro x 0.7545 / Euro
Euros to be sold = $997,883.88
The profit/loss can be calculated by subtracting the original starting amount of dollars by the post-arbitrage amount:
Profit/loss = $997,883.88 - $1,000,000
Profit/loss = -$2,116.12
In both instances a loss is made by the arbitrage. The arbitrager cannot make a profit using these quotes.
