Question

You observed the bid rate of a New Zealand dollar is $.3324 while the ask rate is $.3342 at Bank X. The bid rate of the New Zealand dollar is $.3232 while the ask rate is $.3249 at Bank Y. What would be your dollar amount profit if you use $1,000,000 to execute locational arbitrage?

Answer 1

The amount of profit is $23,084

Step-by-step explanation:

First of all we need to convert the $1,000,000 to NZ$ as follow

Amount in NZ$ = Amount / Ask rate at Bank Y

Amount in NZ$ = $1,000,000 / $0.3249 per NZ$

Amount in NZ$ = NZ$ 3,077,870.11

Now sell the amount in the Bank X

Amount of Dollar available after sale = Amount in NZ$ x bid rate at Bank X

Amount of Dollar available after sale = NZ$ 3,077,870.11 x $0.3324 per NZ$

Amount of Dollar available after sale = $1,023,084.03

Now calculate the arbitrage profit

Arbitrage profit = $1,023,084.03 - $1,000,000

Arbitrage profit = $23,084.03

Arbitrage profit = $23,084