Suppose Air France receives the following indirect quotes in New York: ?0.92 - 3 and £0.63 - 4. Given these quotes, what range of £/ ? bid and ask quotes in Paris will permit arbitrage?
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ANSWER. Triangular arbitrage can take place in either of two ways: (1) Convert from euros to dollars (at the ask rate), then from dollars to pounds (at the bid rate), or (2) convert from pounds to dollars (at the ask rate), then from dollars to euros (at the bid rate). The first quote will give us the bid price for the euro in ...
This posting provides a detailed solution to the given Triangular arbitrage question.