Sample Arbitrage Scheme for New York and Tokyo

You own $10,000. The dollar rate in Tokyo is 216.6752.

The yen rate in New York is given in the preceding table. Are arbitrage profits possible? Set up an arbitrage scheme with your capital. What is the gain (loss) in dollars?

New York

YEN / USD = 1 / (0.004700 USD / YEN) = 212.7660 per USD

10,000 x 212.76596 = 2,127,660 YEN

Tokyo

10,000 x 216.6752 = 2,166,752 YEN

Gain =  2,166,752 – 2,127,660 = 39,092 YEN

Gain USD = 39,092 x 0.004700 = $183.7324

Arbitrage profits are possible by buying YEN in Tokyo and selling it New York. The net gain from $10,000 would be $183.73

 

Compute the Canadian dollar/yen spot rate from the data in the preceding table.

(CAD / YEN) = (USD /YEN ) x (1 / (CAD /USD))

= 0.004700 x  (1 / 0.8450)

= 0.005562

CAD to YEN Spot Rate = 0.005562

 

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