Triangular Arbitrage the U

question 7

Multiple Choice

Triangular Arbitrage The U.S. dollar spot exchange rate with the Australian dollar is $1 = AU$1.2219. The U.S. dollar and euro exchange rate is $1 = €0.7595. If the cross-rate between the euro and Australian dollar is €1 = AU$1.575 then show that an arbitrage is possible. What positions should be taken to profit from the mispricing?

• A) Starting with U.S. dollars, buy Australian dollars and convert them to euros and then back to U.S. dollars.
• B) Starting with U.S. dollars, buy euros and convert them to Australian dollars and then back to U.S. dollars.
• C) Starting with euros, buy U.S. dollars and convert them to Australian dollars and then back to euros.
• D) Starting with Australian dollars, buy euros and convert them to U.S. dollars and then back to Australian dollars.

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