Triangular Arbitrage the U

question 85

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

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Definitions:

Shelter Principle

A legal concept in real estate and commerce that protects the rights of a subsequent buyer of property if the immediate seller had legitimate rights to transfer it.

HDC Rights

Rights of a Holder in Due Course, which protect the holder of a negotiable instrument from certain defenses and claims that could invalidate the instrument.

Indorses

Signs or writes one's name on the back of (a document) to make it transferable or to add details, also referred to as endorsing.

Note Payable

A written promise to pay a specified amount of money, usually with interest, at a future time.