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(Ignore bid-ask spreads for this problem.) Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting USD/EUR = 0.9321 (thus $1 buys €0.9321) (Yes I know this does not follow our usual convention for the Euro as the base currency, blame the textbook I stole this question from!) and Credit Suisse is offering USD/CHF (thus $1 buys SFr1.0005). You learn that UBS is making a direct market between the Swiss franc and the euro, with a current CHF/EUR quote of 0.9216 (thus SFr1 buys €0.9216). a. Show how you can make a triangular arbitrage profit by trading at these prices. Assume you have SFr1,000,000 with which to conduct the arbitrage. b. What happens if you initially sell Swiss francs for Euros? c. What CHF/EUR price will eliminate triangular arbitrage?

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Financial Management, Finance

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