Question

Jim Waugh specializes in cross-rate arbitrage. He notices the following quotes:

Swiss franc/dollar=A$1.5971/$
Australian dollar/U.S. dollar=A$1.8215/$
Australian dollar/Swiss franc=A$1.1450/SFr
If there is an arbitrage opportunity, what steps would you take to make an arbitrage profit, and how much would you profit if you have $1,000,000 available for this purpose?

Answer 1

Jim Waugh can look for an arbitrage opportunity between different currencies by converting the money through different exchange rates. However, with the provided quotes and a starting capital of $1,000,000, he ends up with less than he started with, indicating that no profitable arbitrage opportunity exists.

Step-by-step explanation:

Jim Waugh specializes in cross-rate arbitrage and identifies the following quotes: Swiss franc/dollar=A$1.5971/$, Australian dollar/U.S. dollar=A$1.8215/$, Australian dollar/Swiss franc=A$1.1450/SFr. To exploit an arbitrage opportunity, Jim can follow these steps with his $1,000,000:

1. Convert $1,000,000 to Australian dollars at A$1.8215/$, receiving A$1,821,500.
2. Convert A$1,821,500 to Swiss francs at A$1.1450/SFr, getting SFr1,589,515.13.
3. Convert SFr1,589,515.13 back to U.S. dollars at A$1.5971/$, ending up with $994,921.79.

Since Jim ends up with less than $1,000,000, there is no profitable arbitrage opportunity. However, the process is important to understand as it affects international trade and exchange rates.