Sample Essay

Pounds can be bought against the dollar fromNew Yorkwhich could then be exchanged for DM inLondonand finally the DM could be exchanged back for dollars atFrankfurtto give profitable currency arbitrage. This would be the result without taking on any risk attached with the currencies being transacted in at varying geographic locations.

If an amount of $8000 dollars has to be invested in this way with transaction costs equivalent to 0.25%, then the procedure would be as follows:

 

Pounds bought atNew York= 0.9975 * (8000/1.991) = £4008.036

DM bought atLondon= 0.9975 * (3.175 * 4008.036) = DM12, 693.7

Dollars bought back atFrankfurt= 0.9975 (0.725 * 12,693.7) = $9179.92

Profit = 9179.92 – 8000 = $1179.92

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Essay: Calculating Transaction Cosst
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