a. National Bank quotes the following for the Mexican peso and the Australian dollar:
|
Quoted Bid Price
|
Quoted Ask Price
|
|
Value of an Australian dollar (A$) in $
|
$0.67
|
$0.69
|
|
|
Value of Mexican peso in $
|
$.074
|
$.077
|
|
|
Value of an Australian dollar in Mexican pesos
|
MXP8.2
|
MXP8.5
|
|
Assume you have $10,000 to conduct triangular arbitrage.What is your profit from implementing this strategy?
Show how you calculate your answer.
b. National Bank quotes the following for the British pound and the Australian dollar:
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Quoted Bid Price
|
Quoted Ask Price
|
|
Value of a British pound (£) in $
|
$1.61
|
$1.62
|
|
|
Value of an Australian dollar (A$) in $
|
$.85
|
$.86
|
|
|
Value of an Australian dollar in British pounds
|
£0.54
|
£0.55
|
|
Observe that triangular arbitrage involves buying Australian dollars with dollars. What is the impact of triangular arbitrage on the quotes above?
Clearly state which quotes will increase or decrease. Clearly state whether each quote is a bid or ask price.