Followings are the spot exchange rates quoted at three different forex markets: USD/INR 48.30 in Mumbai GBP/INR 77.52 in London GBP/USD 1.6231 in…
CA Final · Advanced Financial Management · MTP · November 2024
Followings are the spot exchange rates quoted at three different forex markets: USD/INR 48.30 in Mumbai GBP/INR 77.52 in London GBP/USD 1.6231 in New York The arbitrageur has USD1,00,00,000. Assuming that there are no transaction costs, explain whether there is any arbitrage gain possible from the quoted spot exchange rates.
Suggested Answer and Working Notes:
The arbitrageur can proceed as stated below to realize arbitrage gains. (i) Buy from USD 10,000,000 At Mumbai 48.30 × 10,000,000 = 483,000,000 (ii) Convert these ₹ to GBP at London (₹ 483,000,000 / 77.52) = GBP 6,230,650.155 (iii) Convert GBP to USD at New York GBP 6,230,650.155 × 1.6231 = USD 10,112,968.26 There is net gain of USD 10,112,968.26 less USD 10,000,000 i.e. USD 112,968.26
Topics: Foreign Exchange Exposure and Risk Management
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