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Triangular Arbitrage Problem

Assume the following information

Value of Canadian dollar in U.S. dollars \$.90
Value of New Zealand dollar in U.S. dollars \$.30
Value of Canadian dollar in New Zealand dollars NZ\$3.02

Given this information , is triangular arbitrage possible? If so, explain the steps that would relect triangular arbitrage, and compute the profit from this strategy if you had \$1,000,000 to use.

What market forces would occur to eliminate any further possibilities of triangular arbitrage?

Please show work, I can't seem to grasp this.

Solution Preview

Given the three foreign exchange rates among the Canadian dollar, the U.S. dollar, and the New Zealand Dollar. Triangular arbitrage will produce a profit whenever the following relation does not hold:

As per the assumed information-

Value of Canadian dollar in U.S. dollars \$.90 i.e. 1 USD = 1/0.90 CAD = CAD 1.11
Value of New Zealand dollar in U.S. dollars \$.30 i.e. 1 USD = 1/0.30 NZD = NZD 3.33
Value of Canadian dollar in New Zealand dollars NZ\$3.02

Hence,