Arbitrage Strategy

XYZ Triangular Arbitrage Strategy: – Comprehensive Problem

You are the Financial Manager of the Trading Division of XYZ Foreign Exchange Division.
Your Asian Division based in Hawaii is providing you the following quotations from Asian Banks. (You may either buy or sell at the stated rates).

Singapore Bank: Singapore dollar quote for Korean Won Won 644.00/S$
Hong Kong Bank: HK$ quote for Singapore dollars HK$ 3.50/S$
Korean Bank: Korean won quote for Hong Kong dollars Won 175.00/HK$

Your Latin American Division in Miami is providing you the following quotations from
South American banks. (You may either buy or sell at the stated rates).

Bank of New York: US dollar quote for Mexican Peso: Peso 10.00/1$
Bank of Cancun: Sol Quote for Mexican Peso: Sol 1 / 3 Peso
Bank of Lima: Dollar quotes for Peru’s Sol: USD 1.00 / 3 Sol

Assume you have an initial wealth of $1,000,000 Hong Kong Dollars in Hong Kong,
and $1,000,000 U.S. dollars in U.S.A.

A. Is Triangular Arbitrage Possible with Asian Currencies? If so, compute XYZ’s profits?

B. Is Triangular Arbitrage Possible with Latin American Currencies? If so, compute XYZ’s profits?

C. As a percentage return on Investment [(Profits/ Investment) x 100], which is a more profitable investment for XYZ, Asian or Latin American currencies?

D. If the cost per transaction in Asia is $8,000 HK Dollars per transaction, and in Latin America it is $25,000 US Dollars per transaction which is a more profitable for XYZ after adjusting for transactions costs: Asia or Latin America?