Question Five: Triangular Arbitrage As of Thursday, January...

Question Five: Triangular Arbitrage As of Thursday, January 6th, 2022, 09:30 pm (GMT) the following quotes apply. Currency Value of GBP in USD Value of NZD in USD Value of GBP in NZD Quote 1.3532 0.6746 1.9123 Answer the following questions. Given the information above, is ""triangular arbitrage"" possible? Why? Or why not? If it is possible, explain the steps that would reflect the ""triangular arbitrage"" process and compute the potential profit from this strategy if you had 1,000,000 USD at your disposal to use for this purpose.

Transcript

00:01 Determine to determine if triangle arbitrage to determine if triangular arbitrage is possible and we teach is possible we need to check if there is an opportunity to make a risk -free profit by exploiting the exchange rate discrepancies between three currencies in a triangular relationship in this case we have the exchange rate for gbp usd in nsd usd and gbp nsd to determine if the triangle arbitrage is possible we can calculate the implied exchange rate between the gpp and nzd by using the exchange rate for gbp divided by usd and nsd divided by nzd divided by usd.

01:10 The implied exchange rate equals to implied exchange rate equals to usd.

01:52 Implied exchange rate equals to 1 .0 .746 which is comparing the implied exchange rate 2 .0067 with the actual exchange rate of 1 .9123 we can see that there is a discrepancy if a triangular arbitrage is possible we should take advantage of this discrepancy by executing a series of trade to exploit the mispricing and makes a risk -free profit so comparing the implied exchange rate with the actual exchange rate so actual exchange rate is 1 .9123 we see discrepancy between the exchange rates so you should take advantage to take advantage of this discrepancy by executing a series of trade to exploit the mispricing.

03:31 So here are the steps for the triangular arbitrage.

03:44 First is convert first is convert usd to gbp at the rate the rate of 1 usd which is equals to 1 .35 into gbp then usd to gbp divided by 1 is equals to gbp.

04:39 Second is to convert the obtained gbp to nsd at the rate of 1 gbp convert gbp to nsd at the rate of 1 gbp this is 1 .35.

05:10 So, nzd gbp to nzd equals to which is equals to $1...

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