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Arbitrage Profits for Two Banks

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Q. Following are provided by two banks:

Bank A: 2786 Pesos / US$

Bank B: 2783 Pesos / US$

A. If we assume no transaction costs, there is an opportunity for arbitrage. If an arbitrageur has US $20,000 how can she make profit and how much can she make? Please show your working out.

B. If there is 1% transaction cost for transactions is there still an opportunity for arbitrage? Please show your working out.

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Solution Summary

The solution examines arbitrage profits for two banks in Pesos and US dollars.

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Q. Following are provided by two banks:

Bank A: 2786 Pesos / US$

Bank B: 2783 Pesos / US$

A. If we assume no transaction costs, there is an opportunity for arbitrage. If an arbitrageur has US $20,000 how can ...

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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