Question

Use the following information to answer this question. The Indian rupee to US dollar exchange rate is quoted at Bank A as INR 74 =1 USD. The Canadian dollar (CAD) to US dollar exchange rate is quoted at Bank B as CAD 1.3 = 1 USD. You learn that Bank C is making a direct market between the Indian rupee and the Canadian dollar INR/CAD quote of 56 INR = 1 CAD.

How much profit can an astute trader with $5,348,673 make from triangular arbitrage between Banks A, B, and C?

Answer 1

Triangular arbitrage involves taking advantage of exchange rate discrepancies to earn a profit by converting money through multiple currencies in a circular fashion.

Step-by-step explanation:

The subject question involves the concept of triangular arbitrage, which is a practice where a trader takes advantage of differences in exchange rates across various markets to make a profit. In this scenario, we have an initial amount of $5,348,673 to engage in arbitrage between the Indian rupee (INR), Canadian dollar (CAD), and US dollar (USD) using the given rates from banks A, B, and C.

Steps Involved in Triangular Arbitrage:

Convert USD to INR at Bank A's rate of INR 74 = 1 USD.

With the INR obtained, convert to CAD at Bank C's rate of 56 INR = 1 CAD.

Finally, convert the CAD back to USD at Bank B's rate of CAD 1.3 = 1 USD.

By calculating the amounts after each conversion, we will notice a discrepancy in the final amount compared to the initial investment, representing the profit from arbitrage.