Forces of Triangular Arbitrage
Response to the following problem:
You obtain the following quotes from different banks. One bank is willing to buy or sell Japanese yen at an exchange rate of 110 yen per dollar. A second bank is willing to buy or sell the Argentine peso at an exchange rate of $.37 per peso. A third bank is willing to exchange Japanese yen at an exchange rate of 1 Argentine peso = 40 yen.
a. Show how you can make a profit from triangular arbitrage and what your profit would be if you had $1,000,000
b. As investors engage in triangular arbitrage, explain the effect on each of the exchange rates until triangular arbitrage would no longer be possible