You observe the exchange rates from the following 4 currencies(US, EU, UK, and Japan): a.$1.19/â‚¬, $1.30/Â£, $0.0091/Â¥ b.â‚¬0.84/$,...

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Finance

You observe the exchange rates from the following 4currencies(US, EU, UK, and Japan):
a.$1.19/â‚¬, $1.30/Â£, $0.0091/Â¥
b.â‚¬0.84/$, â‚¬1.09/Â£, â‚¬0.0076/Â¥
c.Â£0.77/$, Â£.91/â‚¬, Â£0.0055/Â¥
d.Â¥110.27/$, Â¥130.77/Â¥, 183.26/Â£
Suppose that you incur 2% transaction costs. That is, if youattempt to convert one currency to another, you only get 98% of thequoted rate. So with â‚¬1, you can get .98*$1.19 = $1.17 There is anarbitrage opportunity in this market. Find it and describe eachtransaction you would take to exploit it. If a large amount ofmoney went through this process, this would exert pressure on theseexchange rates. For each transaction in your arbitrage strategy,explain how that transaction would impact currency values.

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3.8 Ratings (320 Votes)

Data Provided
Currency	$	Pound	Euro	Yen
$	Â Â Â Â Â Â Â Â Â Â 1.000000	Â Â Â Â Â Â Â Â Â Â 0.840000	Â Â Â Â Â Â Â Â Â Â 0.770000	Â Â Â Â Â Â 110.270000
Pound	Â Â Â Â Â Â Â Â Â Â 1.190000	Â Â Â Â Â Â Â Â Â Â 1.000000	Â Â Â Â Â Â Â Â Â Â 0.910000	Â Â Â Â Â Â 130.770000
Euro	Â Â Â Â Â Â Â Â Â Â 1.300000	Â Â Â Â Â Â Â Â Â Â 1.090000	Â Â Â Â Â Â Â Â Â Â 1.000000	Â Â Â Â Â Â 183.260000
Yen	Â Â Â Â Â Â Â Â Â Â 0.009100	Â Â Â Â Â Â Â Â Â Â 0.007600	Â Â Â Â Â Â Â Â Â Â 0.005500	Â Â Â Â Â Â Â Â Â Â 1.000000

Solution
		Convertion of Pound to $	Conversion of $ to Euro	Conversion of $ to Yen
Convertion of $ to Pound	Â Â Â Â Â Â Â Â Â Â Â Â 0.84034	Â Â Â Â Â Â Â Â Â Â Â Â 0.76471	Â Â Â Â Â Â Â Â 109.89076
Conversion of $ to Euro	Â Â Â Â Â Â Â Â Â Â Â Â 0.83846	Â Â Â Â Â Â Â Â Â Â Â Â 0.76923	Â Â Â Â Â Â Â Â 140.96923
Conversion of $ to Yen	Â Â Â Â Â Â Â Â Â Â Â Â 0.83516	Â Â Â Â Â Â Â Â Â Â Â Â 0.60440	Â Â Â Â Â Â Â Â 109.89011

As can be seen from the highlighted yellow tables above - Conversion of $ to Yen via converting $ to Euro is beneficial
Conversion of Dollar to Eurio			Â Â Â Â Â Â Â Â Â Â 0.769231
Less : Transaction Cost @ 2%			Â Â Â Â Â Â Â Â Â Â 0.015385
Euro available after converting $ to Euro		Â Â Â Â Â Â Â Â Â Â 0.753846
Convert avaiable Euro to Yen			Â Â Â Â Â Â 137.062937
If Dollar Directly Converty to Yen (After Transaction Cost of 2%)	Â Â Â Â Â Â 108.064600
Benefit of Yen				Â Â Â Â Â Â Â Â 28.998337

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You observe the exchange rates from the following 4 currencies(US, EU, UK, and Japan): a.$1.19/â‚¬, $1.30/Â£, $0.0091/Â¥ b.â‚¬0.84/$,...

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