Practice Question of International Arbitrage
Practice Question of International Arbitrage
Practice Question of International Arbitrage
QUESTION NO 01
A) Locational Arbitrage. Assume the following information:
Beal Bank
Yardley Bank
Bid Price of New Zealand $
$.401
$.405
Ask Price of New Zealand $ $.404
$.400
Given this information, is locational arbitrage possible? If so, explain the steps involved in
locational arbitrage, and compute the profit from this arbitrage if you had $1 million to use. What
market forces would occur to eliminate any further possibilities of locational arbitrage?
QUESTION NO 02
B) Locational Arbitrage.
AKRON BANK
ZYN BANK
BID
ASK
BID
ASK
British Pounds
$ 1.60
$ 1.61
$ 1.61
$ 1.62
QUESTION NO 03
C) Locational Arbitrage.
NORTH BANK
SOUTH BANK
BID
ASK
BID
ASK
NZ $
$ .635
$ .640
$ .645
$ .650
QUESTION NO 04
The first arbitrage opportunity relates to locational arbitrage. Holt has obtained spot rate
quotations from two banks in Thailand: Minzu Bank and Sobat Bank both located in Bangkok.
The bid and ask prices of Thai baht for each bank are displayed
in the table below:
Minzu Bank
Sobat Bank
Bid
$.0224
$.0228
Ask
$.0227
$.0229
Determine whether the foreign exchange quotations are appropriate. If they are not appropriate,
Determine the profit you could generate by withdrawing $100,000 from Blades checking
account and engaging in arbitrage before the rates are adjusted.
QUESTION NO 05
Besides the bid and ask quotes for the Thai baht provided in the previous question, Minzu Bank
has provided the following quotations for the U.S. dollar and the Japanese yen:
Minzu Bank
Sobat Bank
Value of Japanese yen in $
$.0085
$.0086
Value of Thai baht in
2.69
2.70
Japanese yen
Determine whether the cross exchange rate between the Thai baht and Japanese yen is
appropriate. If it is not appropriate, determine the profit you could generate for Blades by
withdrawing $100,000 from Blades checking account and engaging in triangular arbitrage
before the rates are adjusted.
QUESTION NO 06
Triangular Arbitrage (Without spread)
Assume that a bank has quoted the British pound () at $1.60, the Malaysian ringgit
(MYR) at $.20, and the cross exchange rate at 1= MYR8.1. If you have $10,000, then
how many dollars will you end up with if you implement this triangular arbitrage
strategy?
$ .200
$ .201
MYR 8.10
MYR 8.20
$ 1.61
0.5938% p.a.
3.75 percent (these rates are not annualized). Holt is aware that covered interest arbitrage, unlike
locational and triangular arbitrage, requires an investment of funds. Thus, he would like to be
able to estimate the dollar profit resulting from arbitrage over and above the dollar amount
available on a 90-day U.S. deposit. Determine whether the forward rate is priced appropriately. If
it is not priced appropriately, determine the profit you could generate for Blades by withdrawing
$100,000 from Blades checking account and engaging in covered interest arbitrage. Measure the
profit as the excess amount above what you could generate by investing in the U.S. money
market.