siecledelumiere
May 19, 2009, 10:51 AM
Hi all,
The question is as follows:
Bank:
Bid Ask
Mexico ($/NP) 10.955 10.965
S.Korea ($/Won) 1177.5 1177.60
A Dealer offers spot prices won/Np which are 1% too high for both Bid & Ask.
What Arbitrage profit can U make using $1m? Explain each step of the process
The solution I suggested was as follows: Bid Ask
1. X-rate+1%: Dealer Quote (Won/NP) (1177.5/10.965)*1.01 (1177.60/10.955)*1.01
2. I sell $1m to the bank above Buy NP 10.955.
3.Then I sell the NP to the Dealer at the Ask Rate i.e(1177.6/10.955)*1.01 & buy Won
10.955*[(1177.6/10.955)*1.01)
4. Then sell the won to the bank 7 buy dollar
The a major disagreement occurs at step 3 'some students say I should use the bid rate?' Can anyone advise & tell me which is the right way to solve the problem?
The question is as follows:
Bank:
Bid Ask
Mexico ($/NP) 10.955 10.965
S.Korea ($/Won) 1177.5 1177.60
A Dealer offers spot prices won/Np which are 1% too high for both Bid & Ask.
What Arbitrage profit can U make using $1m? Explain each step of the process
The solution I suggested was as follows: Bid Ask
1. X-rate+1%: Dealer Quote (Won/NP) (1177.5/10.965)*1.01 (1177.60/10.955)*1.01
2. I sell $1m to the bank above Buy NP 10.955.
3.Then I sell the NP to the Dealer at the Ask Rate i.e(1177.6/10.955)*1.01 & buy Won
10.955*[(1177.6/10.955)*1.01)
4. Then sell the won to the bank 7 buy dollar
The a major disagreement occurs at step 3 'some students say I should use the bid rate?' Can anyone advise & tell me which is the right way to solve the problem?