Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting €0.7627/$1.00 and Credit Suisse is offering CHF1.1806/$1.00. You learn that UBS is making a direct market between the Swiss franc (CHF) and the euro, with a current €/CHF quote of 0.6395. Assume you have $5,000,000 with which to conduct the arbitrage.
(a) Show how you can make a triangular arbitrage profit by trading at these prices. Please list your strategies and determine the triangular arbitrage profit. (Ignore bid-ask spreads for this problem.)
(b) What happens if you initially sell dollars for Swiss francs?
(c) What €/CHF price will eliminate triangular arbitrage?