I would argue S2000 is a liability to the CFA institute…think of the amount of money he’s cost them by helping people pass the exam and not paying fees to retake
stupid question but is there a quicker way to tell which direction to go for abritrage profit without calculating both directions… i.e USD–>GBP–>EUR–>USD or USD-EUR-GBP-USD
or is the whole point of the question to calculate both ways
The first thing I do is calculate the inverse of each given bid/ask so that I have all the possible exchange rates in front of me (the bid/asks switch when calculating the inverses.) If the problem gives you the bid/ask for USD/EUR you’ll now also have the bid/ask for EUR/USD as well. It only takes a minute but actually saves time later on in the calculation
Then I draw a triangle with a currency at each point. I start with 1 dollar and go clockwise. Figuring out which exchange rate to use should be easy with all the possibilities already calculated. Remember, you should use the exchange rate you would prefer not to use–the one which will get you the lesser amount of foreign currency. Because you have it in format FOREIGN/BASE this will be the bid.
If you don’t calculate an arbitrage profit try again by going counter-clockwise. You may have to do the calculation both ways.
Initially these problems seem difficult but they become easy points with practice.
It’s not a stupid question, but there’s no quicker way.
After you’ve done a ton of these you’ll have a better feel for which direction is likely to give an arbitrage profit (and you’ll get a profit in at most one direction), but there will still be times when you’ll try one way, get a loss, and have to try the other way.
