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Essay: Arbitrage IRP Exchange and Inflation

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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