Question

Assuming the following quotes, calculate how a market trader at Citibank with $1,000,000 can make an intermarket arbitrage profit. First establish if there is the possibility of arbitrage profit. Second show that path and amount of profit.

Citibank quotes U.S. dollar per pound: $1.5900/£

National Westminster quotes euros per pound: €1.2000/£

Deutschebank quotes U.S. dollar per euro: $0.7550/€

Answer 1

68 A B C D E F G Citibank 1 pound = National Westminster 1 pound = 1.5900 $ 1.2000 Euro As per above rate Deutschebank 1 euro 1 euro 1.3250 $ 0.7550 $ 8 Il 11 9 10 Rate of euro is different so arbitrage possible 11 13 Initial investment Convert to euros at Deutschebank quote Convert eursos to pound at NatWest quote Convert pound to US$ at Citibank qoute 1000000.00 $ 1324503.31 Euro 1103752.76 pound 1754966.89 $ 17 Arbitrage gain 754966.89 18 19

Alignment Number Clipboard H8 - Font Bio A C D E F N 7 = Citibank National Westminster 1 pound = 1.59 1 pound = 1.2 $ Euro 0 o 1 As per above rate Deutschebank 1 euro 1 euro = =1/E5*E4 § = 0.755 $ 10 Rate of euro is different so arbitrage possible 11 12 13 Initial investment Convert to euros at Deutschebank quote Convert eursos to pound at NatWest quote Convert pound to US$ at Citibank qoute 1000000 $ =E12/E8 Euro =E13/E5 pound =E14*54 5 14 15 16 17 Arbitrage gain =E15-E12 18 19 20 21