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CFA Level I · CFA Level I Exam · Exchange Rate Calculations

A trader has EUR 1,000,000. Quotes: USD/EUR = 1.1000, JPY/USD = 150.00, and a dealer's JPY/EUR = 168.00. Ignoring transaction costs, the best triangular arbitrage profit, in euros, is closest to:

The arbitrage profit is about EUR 18,000. Selling EUR 1,000,000 to the dealer yields JPY 168 million, which converts to USD 1.12 million, and then to about EUR 1,018,182. The profit arises because the dealer's yen price for euros exceeds the implied 165.00 cross.

  1. AEUR 0
  2. BEUR 18,000Correct
  3. CEUR 27,273

Explanation

Implied cross is 165.00 JPY/EUR, below the dealer's 168.00, so sell euros to the dealer: 1,000,000 × 168 = JPY 168,000,000. Convert to USD at 150: 1,120,000 USD. Convert to EUR at 1.10: 1,018,181.82 EUR. Profit = about 18,182, closest to 18,000. The 27,273 figure comes from applying the wrong direction.

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