Products

Holooly Rewards

We are determined to provide the latest solutions related to all subjects FREE of charge!

Please sign up to our reward program to support us in return and take advantage of the incredible listed offers.

Enjoy Limited offers, deals & Discounts by signing up to Holooly Rewards Program

Holooly Ads. Manager

Advertise your business, and reach millions of students around the world.

Holooly Tables

All the data tables that you may search for.

Holooly Arabia

For Arabic Users, find a teacher/tutor in your City or country in the Middle East.

Holooly Sources

Find the Source, Textbook, Solution Manual that you are looking for in 1 click.

Holooly Help Desk

Need Help? We got you covered.

Chapter 8

Q. 8.MSE.10

You go to a bank and are given these quotes:
You can buy a euro for 14 Mexican pesos.
The bank will pay you 13 pesos for a euro.
You can buy a U.S. dollar for .9 euros.
The bank will pay you .8 euros for a U.S. dollar.
You can buy a U.S. dollar for 10 pesos.
The bank will pay you 9 pesos for a U.S. dollar.
You have $1,000. Can you use triangular arbitrage to generate a profit? If so, explain the order of the transactions that you would execute and the profit that you would earn. If you cannot earn a profit from triangular arbitrage, explain why.

Step-by-Step

Verified Solution

Yes, you can generate a profit by converting dollars to euros, and then euros to pesos, and then pesos to dollars. First convert the information to direct quotes:

Bid Ask
Euro in $ 1.11 1.25
Pesos in $ $.10 $.11
Euro in pesos 13 14

Use $1,000 to purchase euros: $1,000/1.25 = 800 euros.
Convert 800 euros to buy pesos: 800 euros × 13 10,400 pesos.
Convert the 10,400 pesos to U.S. dollars: 10,400 × $.10 = $1,040.
There is profit of $40 on a $1,000 investment.

The alternative strategy that you could attempt is to first buy pesos:
Use $1,000 to purchase pesos: $1,000/$.11 = 9,090.9 pesos.
Convert 9,090 pesos to euros: 9,090.9/14 = 649.35 euros.
Convert 649.35 euros to dollars: 649.35 euros × 1.11 = $720.78.
This strategy results in a loss.