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CMA Final · Strategic Financial Management · The International Financial Environment

Spot INR/USD cross rates are derived from: USD/INR 83.00 and GBP/USD 1.2500. A UK trader finds GBP/INR quoted at Rs 105.00 in Mumbai. Ignoring costs, an arbitrageur starting with GBP 1,000,000 who sells GBP in Mumbai for INR, converts INR to USD and USD back to GBP earns a profit in GBP of closest to:

The implied cross rate is 103.75 rupees per pound, below the Mumbai quote of 105. Selling pounds in Mumbai, then buying dollars and then pounds, turns GBP 1,000,000 into about GBP 1,012,048, a profit of roughly GBP 12,048.

  1. AGBP 12,048Correct
  2. BGBP 0
  3. CGBP 21,000
  4. DGBP 1,000

Explanation

Cross rate = 83.00 x 1.25 = 103.75 INR per GBP. Selling GBP 1,000,000 at 105 gives Rs 105,000,000; converting at 83 gives USD 1,265,060; at 1.25 USD per GBP this is GBP 1,012,048. Profit = GBP 12,048. Check: 1,000,000 x 105/103.75 = 1,012,048.

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