Triangular Arbitrage & IRP

CFA Level II Economics
#1

Hey Guys!

I am getting quite confused with the Triangular Arbitrage questions…like i do understand which one is cheaper to buy and which one should i sell but i just cant go ahead with it then…Can you guys help?

Let’s take an example -

USD/MXN - 0.6000 - 0.6015

USD/MXN - 0.0933 - 0.0935

Q1. Compute MXN/AUD Implied Rate

Q2. If Dealers gave a quote MXN/AUD - 6.3000 - 6.3025, is there an arbitrage profit if you start with USD 1 Million?

Guys please try the right way to think about this question. Secondly, i am just lost with the IRP concepts…Some doubts.

Covered IRP - Hedged with Derivatives - So it should hold in short run as well right?

Uncovered IRP - not hedged…says Expected S0 = S0(1 + Fr/1+Dr)

But eventually both the equations state that Rate of Domestic - Rate of Foreign (Rd-Rf) is the actual profit to the investor…am i thinking right? What is the question about Forward rates being an unbiased estimator…well it would be better if you guys can brief it for me in a simple way…

I would really aprreciate the effort…Thank you so much guys.

#2

any update?

#3

Seems you missed state AUD/USD parity so you cannot determine is an arbitrage opportunity for pair MXN/AUD exist.

Otherwise, arbitrage opportunity would exist if dealer’s qoute MXN/AUD 6.300-6.3025 is out of your currency pair range (f.ex. MXN/AUD 6.400-6.420).

If so, just start with USD in required amount (1M) with simply rules:

buy base currency at ask and sell at bid and buy price currency at bid and sell at ask, always move in clockwise and divide when you go down or multiply when you go up. Once when you make full circle, the result is an arbitrage profit. Use dealer qoute for certain pair, otherwise use given qoutes.

#4

I wrote an article on triangular arbitrage that may be of some help here: http://financialexamhelp123.com/triangular-arbitrage/