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There are three foreign exchange markets:

Market 1: ¥1=$0.01

Market 2: MYR 1= $0.2 

Market 3: MYR 1= ¥25

Note:  

¥ is the Japanese Yen.

MYR is the Malaysian Ringgit.

$ is the U.S. dollar.

a. Suppose you hold Japanese Yen, Malaysian Ringgit, and dollars. Is it possible for you to do arbitrage in the above three markets? If yes, how would you engage in arbitrage to profit from these three rates? What is your profit?

b. Is there any pressure on the cross-rate between the Yen and the MYR? What must the value of the cross-rate between the Yen and the MYR be to eliminate the opportunity for triangular arbitrage?

Business Management, Management Studies

  • Category:- Business Management
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