Detail procedures must be provided for earning credits 1. Bid-ask rates and arbi

Question

Detail procedures must be provided for earning credits 1. Bid-ask rates and arbitrage): A corporate treasury with operations in New York simultaneously calls Citibank in midtown (New York City) and Barclays in London. The two banks give the following quotes at the same time on the euro: Citibank NY. $1.2637-1.2657€ Barclas London $1.2670-1.2690 (a) If the corporate treasury sell $1 million at Citibank, what is the equivalent amount of that the corporate treasury can receive? (b) If the corporate treasury can use $1 million, is it possible for the corporate treasury to make geographic arbitrage profit with the two exchange rate quotes. (c) If possible, calculate the arbitrage profit. If not, the arbitrage profit is set to 0.

Explanation / Answer

1. When you sell 1 dollar to Citi bank, you recieve 1/1.2657 Euro.

Workings:

1Euro = 1.2657$

1$=1/1.2657euro (when you sell dollar)

1$ = 0.790076

So when you sell 1million dollar you will get (1million × 0.790076) which is equal to 790076 Euros.

2. Now when you sell back to the Barclays, you get

790076 × 1.2670 = $1001027

Now initial money you had in hand was 1 million.

Profit = 1001027-1000000

=1027$

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.