Q50990a At two forex centers, the following Re-US $ rates are quoted: London : Rs 47.5730 – 47.6100

Tokyo              : Rs 47.6350 – 47.6675

Find out arbitrage possibilities for an arbitrageur who has Rs 100 million.

Best for MIMB Finance Solved Assignment and others

Solution:

The following modus operandi will be deployed by the arbitrageur:

  • He will buy US $ from the London forex market at the rate of Rs 47.6100, as it is cheaper there compared to the Tokyo market (Rs 47.6350). He will obtain (Rs 100 million/Rs 47.6100) US $2,100,399.075 on conversion.
  • He will sell US $2,100,399.075 at the rate of Rs 47.6350 per US $ and will obtain Rs 100,052,509.90.
  • As a result of arbitrage, he will earn a profit of Rs 52,059.90 (Rs 100,052,059.90 – Rs 100 million) without any risk.
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