FX Rates & Currency Trading
This week’s homework is divided into two parts. First, please answer the 2 questions below. Second, you will develop a trading strategy based on a concept known as “triangular arbitrage.” Below you will find links to four brief videos explaining the concept & how to test for its existence.
1. For purposes of this worksheet, assume the following exchange rates.
EURUSDbid = 1.20
A. Are these direct (American) or indirect (European) ?
B. Suppose an American exporter has just received a payment of € 100,000, how many dollars will result upon conversion?
C. Suppose an American restaurant budgets $10,000 to restock its wine cellar with French wine. How many euros does it have to spend.
D. Suppose a Canadian investor wants to purchase $100,000 worth of U.S. Treasury bonds. What is the CAD cost of this investment?
2. For the following problems assume that there are no bid/ask spreads and that EURUSD =1.20 and CADUSD =.60.
A. What is the quote, in Canadian dollars for euros?
B. What is the quote in euros for Canadian dollars?
C. Suppose that you are a currency trader and you see the quotes described above, but you also notice that in London they are giving quote of CADEUR =.505. Does this present an arbitrage opportunity, and if so, how much money can you make with an initial investment of $1,000,000?
make $10,000 as profit
Cross Rates and Triangular Arbitrage. Let’s look more closely at question 2 above. In this section I'll take you through a series of four videos examining the possibility of generating a profit through triangular arbitrage. Triangular arbitrage involves moving money from one currency to another to a...
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