Triangular Arbitrage You go to a bank and are given these quotes: You can buy a euro for 14 pesos. The bank will pay you 13 pesos for a euro. You can buy a U.S. dollar for 0.9 euro. The bank will pay you 0.8 euro for a U.S. dollar. You can buy a U.S. dollar for 10 pesos. The bank will pay you 9 pesos for a U.S. dollar. You have $1,000. Can you use triangular arbitrage to generate a profit? If so, explain the order of the transactions that you would execute and the profit that you would earn. If you cannot earn a profit from triangular arbitrage, explain why.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 7, Problem 32QA
Textbook Problem

Triangular Arbitrage You go to a bank and are given these quotes:

You can buy a euro for 14 pesos.

The bank will pay you 13 pesos for a euro.

You can buy a U.S. dollar for 0.9 euro.

The bank will pay you 0.8 euro for a U.S. dollar.

You can buy a U.S. dollar for 10 pesos.

The bank will pay you 9 pesos for a U.S. dollar.

You have $1,000. Can you use triangular arbitrage to generate a profit? If so, explain the order of the transactions that you would execute and the profit that you would earn. If you cannot earn a profit from triangular arbitrage, explain why.

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