As an employee of the foreign exchange department for a large company, you have been given the following information: Beginning of Year Spot rate of £ = 51.596 Spot rate of Australian dollar ( As ) = $ 0.70 Cross exchange rate: £ 1 = A S 2.28 One-year forward rate of AS = $ 0.71 One-year forward rate of £ = 51.58004 One-year U.S. interest rate = 8.00 % One-year British interest rate = 9.09 % One-year Australian interest rate = 7.00 % Determine whether triangular arbitrage is feasible and, if so, how it should be conducted to make a profit.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter P2, Problem 1Q
Textbook Problem

As an employee of the foreign exchange department for a large company, you have been given the following information:

Beginning of Year Spot rate of £ = 51.596

Spot rate of Australian dollar ( As ) = $ 0.70

Cross exchange rate: £ 1 = A S 2.28

One-year forward rate of AS = $ 0.71

One-year forward rate of £ = 51.58004

One-year U.S. interest rate = 8.00 %

One-year British interest rate = 9.09 %

One-year Australian interest rate = 7.00 %

Determine whether triangular arbitrage is feasible and, if so, how it should be conducted to make a profit.

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