Final answer:
Triangular arbitrage exists in this scenario, as the implied cross rate of 86.00 Yen per Canadian Dollar is less than the direct rate of 88.12 Yen per Canadian Dollar at market B. By buying Canadian dollars with Yen at market B, converting them to U.S. dollars at market C, and then changing U.S. dollars back to Yen at market A, an arbitrager could realize a profit of approximately 2.47%.
Step-by-step explanation:
To determine if triangular arbitrage opportunity exists with the given exchange rates, we need to calculate the implied cross rate between the Japanese Yen (¥) and Canadian Dollar (C$) using the exchange rates provided between market A and C, and compare it with the direct exchange rate provided in market B.
The given exchange rates are:
- Market A: ¥/U$ = 112.73
- Market C: C$/U$ = 1.3113
- Market B: ¥/C$ = 88.12
The implied cross rate is found by dividing the ¥/U$ rate by the C$/U$ rate:
¥/C$ = (¥/U$) / (C$/U$) = 112.73 / 1.3113 = 86.00
Since the implied cross rate of 86.00 Yen per Canadian Dollar is less than the direct exchange rate in market B of 88.12, we can conclude that arbitrage opportunity exists. To conduct the triangular arbitrage, one would:
- Buy Canadian dollars with Yen in market B at 88.12 ¥/C$.
- Convert the Canadian dollars to U.S. dollars in market C at the rate of 1.3113 C$/U$.
- Then convert the U.S. dollars back to Yen in market A at the rate of 112.73 ¥/U$.
Profit is computed by the rate differences, and the percentage profit possible from this arbitrage is calculated as follows:
(Direct rate - Implied rate) / Implied rate * 100\%
(88.12 - 86.00) / 86.00 * 100\% = 2.4651\%
Therefore, the percentage profit possible from triangular arbitrage in this scenario is approximately 2.47\%.