Triangular Arbitrage Illustration 5
(a) In London a dealer quotes:
DEM/GBP Spot 3.5250/55
JPY/GBP Spot 180.80/181.30
(i) What do you expect the JPY/DEM rate to be in Frankfurt?
(ii) Suppose that in Frankfurt you get a quote JPY/DEM spot 51.1530/51.2550, is there an arbitrage opportunity?
(b) Assume there are no transaction costs, what advantage can be drawn from the following quotes:
$ 1.6012 = £ 1 in N.Y.
F Fr 4.9800 = $ 1 in Paris
F Fr 7.8200 = £ 1 in London.
(Ans.: (a) Cross Rates 51.2835/51.4326, Gain 556 (b) Gain 19,690)
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