Assume the following information for a bank quoting on spot exchange rates:
Exchange rate of Singapore dollar in U.S.$
=
$)60
Exchange rate of pound in U.S.$
=
$1)50
Exchange rate of pound in Singapore dollars
=
S$2)6

Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?
A) The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.
B) The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.
C) The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate.
D) The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate.

Question

Assume the following information for a bank quoting on spot exchange rates: ​
Exchange rate of Singapore dollar in U.S.$
=
$)60
Exchange rate of pound in U.S.$
=
$1)50
Exchange rate of pound in Singapore dollars
=
S$2)6
​
Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?
A) The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.
B) The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.
C) The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate.
D) The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate.

Quizplus · Accepted Answer

According to the given exchange rates, if we use triangular arbitrage:
1) Convert 1 U.S. dollar to Singapore dollars: 1 USD x 1/0.60 SGD/USD = 1.67 SGD
2) Convert the obtained Singapore dollars to pounds: 1.67 SGD x 1/2.6 SGD/GBP = 0.64 GBP
3) Convert the obtained pounds back to U.S. dollars: 0.64 GBP x 1.50 USD/GBP = 0.96 USD
Therefore, by using triangular arbitrage, we obtained 0.96 U.S. dollars by investing 1 U.S. dollar. As this value is more than the initial value of 1 U.S. dollar, arbitrage opportunities will exist, leading to an increase in demand for pounds and a decrease in demand for Singapore dollars, which will eventually result in the Singapore dollar value in U.S. dollars depreciating, the pound value in U.S. dollars appreciating, and the pound value in Singapore dollars depreciating. Thus, option B is the best choice.

Assume the Following Information for a Bank Quoting on Spot