question archive James, an investor who is actively looking for the opportunity to gain from arbitrage
James, an investor who is actively looking for the opportunity to gain from arbitrage
Subject:FinancePrice:2.86 Bought11
James, an investor who is actively looking for the opportunity to gain from arbitrage. He acquires the following quotes from three different banks. Bank A is willing to buy or sell Japanese yen at an exchange rate of 113 yen per dollar. Bank B is willing to buy or sell the Argentine peso at an exchange rate of $0.40 per peso. Bank C is willing to exchange Japanese yen at an exchange rate of 1 Argentine peso for 42 yen.
a) Show how James can make profit from triangular arbitrage?
b) What is the James profit/loss would be if he had $2,000,000?
c) As investors engage in triangular arbitrage, explain how their activities influence each of the exchange rates until triangular arbitrage is no longer feasible.
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a) Now, First lets calculate the ARP - JPY from the below strategy:
Buy JPY from USD at 113, then exchange JPY for AGP at JPY42/AGP and then Buy USD from AGP
Therefore for USD 1 = JPY 113 ... Step 1
113 JPY = 2.69 AGP
AGP 2.69 = USD 1.07619
b) Now, with USD 2,000,000 the Profit = USD 152,381
c) As the investors engage in the arbitrage, the demand for USD to JPY will rise when there is a primary buy, with that JPY, the same is exchanged with ARP leading to the appreciation of the ARP, which will reflect in the ARP-USD which will fall (due to ARP appreciation) and hence the window will start to close.
