The New Zealand dollar and U.S. dollar S($/NZD) spot exchange rate is 0.6717. Th

Question

The New Zealand dollar and U.S. dollar S($/NZD) spot exchange rate is 0.6717. The Japanese yen and U.S. dollar S(¥/$) spot exchange rate is 120.12. If market is quoting the Japanese yen and New Zealand dollar S(¥/NZD) spot exchange rate at 78.89, determine if there is any triangular arbitrage. How much can you profit (in US dollar) if you can borrow up to $1,000,000. Be sure to answer the following questions:

(1) What is the cross-exchange rate between yen and NZD, S(¥/NZD)?

(2) If there is arbitrage opportunity, state clearly each step necessary to capture the profit.

(3) How much is the arbitrage profit in US dollar?

Explanation / Answer

1. Cross exchange rate =

1NZD = ¥ 78.89

1 ¥ = NZD 1/78.89 = 0.0127

2. yes there is arbitrage opportunity.

Following are the steps to capture the profit.

We are give that 1NZD = $ 0.6717,

by applying the cross rate formula same as above we get,

1$ = NZD 1.4888

1¥ = 0.0083$

Now 1$ = 1.5301

to make profit, buy at 1.4888 and sell at 1.5301

3.

profit by arbitrage

buy 1488800

Sell 1530100

profit in $ terms is: 27740

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