Question

Swissie Triangular Arbitrage. The following exchange rates are available to you. (You can buy or sell at the stated? rates.) Assume you have an initial SF11,400,000. Can you make a profit via triangular arbitrage? If so, show the steps and calculate the amount of profit in Swiss francs? (Swissies).
Mt. Fuji Bank yen 93.61/$
Mt. Rushmore Bank SF1.08/$
Mt. Blanc Bank yen 88.17/SF
Calculate the first and the second arbitrage opportunity attempt below: (Round to the nearest cent.)

Answer 1

Answer:

a. Yes. You can make a profit via triangular arbitrage.

b. The steps are:

1. Use the SF11,400,000 to buy yen at Mt. Blanc Bank at yen 88.17/SF.  This will yield yen 1,005,138,000 (SF11,400,000 * yen 88.17).

2. Use the yen purchased above, yen 1,005,138,000, to buy dollars at Mt. Fuji Bank at yen 93.61/$.  This will result to $10,737,506.68 (yen 1,005,138,000 / yen 93.61).

3. Use the dollar $10,737,506.68 to buy swiss francs at Mt. Rushmore Bank at the exchange rate of yen SF1.08/$.  This will yield SF 11,596,507.21 ($10,737,506.68 * SF1.08).

4. The arbitrage gain = SF 196,507.21 (SF 11,596,507.21 - SF 11,400,000).

Explanation:

Triangular arbitrage exists when there are discrepancies in the exchange rates of three countries.  These discrepancies are then taken advantage of by arbitrageurs in order to realize some profits by engaging in currency trading and speculation.  It is legally recognized in the USA as a means of providing liquidity to exchange markets and ensuring market efficiency.