Question

Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for an investor who has $500,000 available to conduct locational arbitrage?​ Group of answer choices ​
A. $500
B. $1,639 ​
C. $2,041
D. $9,804

Answer 1

Answer:

B. $1,639 ​

Explanation:

To do arbitraje we will ask at Bank A for $0.305

and then bid in Bank B at $0.306

As the transactions has no cost we are doing a profit by using the exchange as they allowed. Doing this procedure will at some point eliminate the difference in exchange rate for these bank as the purchase will rise the ask rate for Bank A and the sale will decrease the bid rate.

$500,000 \times \frac{0.306}{0.305}$

Total: 501639,3442622951

The profit will be for: 501,639.34 - 500,000 = 1,639.34