# finc853

Pages: 3 (912 words) Published: October 14, 2014

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.

Part I
1. For purposes of this worksheet, assume the following exchange rates.

EURUSDbid = 1.20

A. Are these direct (American) or indirect (European) ?

Direct

B. Suppose an American exporter has just received a payment of € 100,000, how many dollars will result upon conversion?

€100,000*1.20=\$120,000

C. Suppose an American restaurant budgets \$10,000 to restock its wine cellar with French wine. How many euros does it have to spend.

\$10,000/1.20=€8,33.33

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?