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Is there a possibility for two-point arbitrage? (b) If so, what will arbitragers do? (c) What is the profit earned from arbitrage?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter8: Relationships Among Inflation, Interest Rates, And Exchange Rates

Section: Chapter Questions

Problem 1BIC

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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

1. The following exchange rates are quoted in Sydney and London at the same time:
Sydney (AUD/GBP) 2.56
London (GBP/AUD) 0.35
(a) Is there a possibility for two-point arbitrage?
(b) If so, what will arbitragers do?
(c) What is the profit earned from arbitrage?

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