3. Triangular Arbitrage. Assume the following information: Quoted Price $.90 $.30 NZ$3.02 Value of Canadian dollar in U.S. dollars Value of New Zealand dollar in U.S. dollars Value of Canadian dollar in New Zealand dollars CAD $0.9 $0.3 NZS On the basis of the direct quotations, what is the theoretically implied cross exchange rate CADNZD, that is, NZS per CAD, based on the no- arbitrage condition? b) Given the market cross rate of NZ$3.02 per CAD and the theoretically implied cross rate, is triangular arbitrage possible? If so, explain the steps that would reflect triangular arbitrage, and compute the profit from this strategy if you had $1,000,000 to use. What market forces would occur to eliminate any further possibilities of triangular arbitrage?
3. Triangular Arbitrage. Assume the following information: Quoted Price $.90 $.30 NZ$3.02 Value of Canadian dollar in U.S. dollars Value of New Zealand dollar in U.S. dollars Value of Canadian dollar in New Zealand dollars CAD $0.9 $0.3 NZS On the basis of the direct quotations, what is the theoretically implied cross exchange rate CADNZD, that is, NZS per CAD, based on the no- arbitrage condition? b) Given the market cross rate of NZ$3.02 per CAD and the theoretically implied cross rate, is triangular arbitrage possible? If so, explain the steps that would reflect triangular arbitrage, and compute the profit from this strategy if you had $1,000,000 to use. What market forces would occur to eliminate any further possibilities of triangular arbitrage?
Chapter7: International Arbitrage And Interest Rate Parity
Section: Chapter Questions
Problem 51QA
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Finance
3. Triangular Arbitrage. Assume the following information: Value of Canadian dollar in U.S. dollars. Value of New Zealand dollar in U.S. dollars Value of Canadian dollar in New Zealand dollars CAD $0.9 $ $0.3 NZ$ Quoted Price $.90 $.30 NZ$3.02 On the basis of the direct quotations, what is the theoretically implied cross exchange rate CADNZD, that is, NZ$ per CAD, based on the no- arbitrage condition? b) Given the market cross rate of NZ$3.02 per CAD and the theoretically implied cross rate, is triangular arbitrage possible? If so, explain the steps that would reflect triangular arbitrage, and compute the profit from this strategy if you had $1,000,000 to use. c) What market forces would occur to eliminate any further possibilities of triangular arbitrage?
Transcribed Image Text:3. Triangular Arbitrage. Assume the following information:
Value of Canadian dollar in U.S. dollars
Value of New Zealand dollar in U.S. dollars
Value of Canadian dollar in New Zealand dollars
CAD
$0.9
$0.3
NZS
Quoted Price
$.90
$.30
NZ$3.02
On the basis of the direct quotations, what is the theoretically implied
cross exchange rate CADNZD, that is, NZS per CAD, based on the no-
arbitrage condition?
b) Given the market cross rate of NZ$3.02 per CAD and the theoretically
implied cross rate, is triangular arbitrage possible? If so, explain the steps that
would reflect triangular arbitrage, and compute the profit from this strategy if
you had $1,000,000 to use.
What market forces would occur to eliminate any further possibilities of
triangular arbitrage?
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