CFA Practice Question

There are 253 practice questions for this study session.

CFA Practice Question

You notice the Dutch guilder is offered at $0.40520 in New York, the Euro is being bid in Europe at $0.89370, and the Dutch guilder is being bid in Rotterdam for E0.45380. You believe arbitrage is possible and set out to find out what the profit on $1,000,000 would be. You find:

A. arbitrage is not possible
B. arbitrage is possible with a profit of $2,648
C. arbitrage is possible with a profit of $891.
Correct Answer: C

The bid cross-rate of .45380 is greater than the expected cross-rate dividing .40520/.89370. If we can cover transaction costs, we want to buy NG, selling NG for Euros, and then sell Euros for $.

1,000,000/.40520 = NG2,467,917.08
NG2,467,917.08 x E0.45380/NG = E1,119,940.77
E1,119,940.77 x $0.89370/E = $1,000,891.07
Profit of $891

User Contributed Comments 1

User Comment
quanttrader sell $1,000,000 to buy 2,467,917 DG in NY, sell the DG for Euros (in Europe) to get 1,119,940.74 and sell the Euros for $ in Europe for $1,000,891 - $891 profit.
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