Sample Essay
The arbitrage is possible.
Steps:
When cross rate is equal to the market rate arbitrage is not possible and vice versa. Therefore, we can have a possible arbitrage here.
Cross rate = value of NZ dollar in $US / value of Canadian dollar in $US
= 0.90 / 0.30 = $3
The actual value of Canadian dollar in terms of New Zealand dollar is $3.02
Hence, arbitrage is possible because the cross rate value is not equal the actual value
Profit calculation = $US 1,000,000 / 0.9 = 1,111,111.111 CAD
= 1,111,111 x 3.02 = 3,355,555.556 $NZD
= 3,355,555.556 x 0.3 = $US 1,006,666.667
= 1,006,666.667 – 1,000,000 = $US 6,666.667
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