Assume you are a trader with Deutsche Bank. From the quote screen on your computer...
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Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Commerzbank is quoting 0.7727/$1.00, and Credit Suisse is offering SFr1.1906/$1.00. You learn that UBS is making a direct market between the Swiss franc and the euro, with a current /SFr quote of 0.6295. Show how you can make a triangular arbitrage profit by trading at these prices. Ignore bid-ask spreads for this problem. Assume you have $5,002,000 with which to conduct the arbitrage. Enter only the numeric portion of your answer without the currency symbols.
Required:
a. What is the implied /SFr cross-rate derived from the dollar exchange rates quoted by Commerzbank and Credit Suisse?
b-1. Describe the sequence of transactions you should undertake to earn a triangular arbitrage profit.
b-2. What is your triangular arbitrage profit?
c. What happens if you initially sell dollars for Swiss francs?
d. What /SFr price will eliminate triangular arbitrage?
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