# FIN 3410 Lecture Notes - Lecture 2: Srf 1, Direct Market, U.S. Route 3

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7 Feb 2017
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Day 2 Notes
EX: 5-11
Triangular Arbitrage
DRB: S(X/\$) = 0.7627 \$1 = 0.7627 X
CS: S(SF/\$) = 1.1806 \$1 = SF 1.1806
UBS is making a direct market between SF and X
UBS: S(X/SF) = 0.6395 SF 1 = 0.6395 X
I = \$5,000,000 (available for the arbitrage)
1. Show how to make a triangular arbitrage profit
2. Find the implied cross-rate
a. Si(X/SF) = S(X/\$) / S(SF/\$) = [0.7627 X / \$] / [SF 1.1806 / \$]
i. = 0.6460 X/SF
b. Si(X/SF) = 0.6460 X/SF =/= S(X/SF) = 0.6395 X/SF
i. Implied cross-rate does not equal UBS quote, so arbitrage is
possible
a. Implied cross rate: 1 SF = 0.6460 X
b. UBS: 1 SF = 0.6395 X
low)
1. X SF
ii. Sell SF to CS (sell high)
1. SF \$
a. Buy X with \$ \$5,000,000 at S = 0.7627 X/\$
i. \$5,000,000 * (0.7627 X/\$) = 3,813,500 X
b. Buy SF with X at S(X/SF) = 0.6395 X/SF
i. 3,813,500 X / (0.6395 X/SF) = 5,963,253 SF
c. Sell SF to CS at S(SF/\$) = 1.1806 SF/\$
i. 5,963,253 SF / (1.1806 SF/\$) = \$5,051,036
d. Arbitrage profit
i. \$5,051,036 - \$5,000,000 = \$51,036
5. What happens if you initially sell \$ for SF?
a. Losses!
6. What X/SF price will eliminate a triangular arbitrage?
a. UBS cross rate S(X/SF) should equal the implied cross rate 0.6460 X/SF
Forward Contract: agreement to buy or sell an asset in the future at prices agreed
upon today
Markets expect value of L in \$ terms
Markets expect that L will depreciate against \$ (\$ will appreciate against L)
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