The Singapore dollar-U.S.dollar (S$/$)spot exchange rate is S$1.60/$,the Canadian dollar-U.S.dollar (CD/$)spot rate is CD1.33/$ and the S$/CD1.15.Determine the triangular arbitrage profit that is possible if you have $1,000,000.

Question

Quizplus · Accepted Answer

To check if there is an opportunity for triangular arbitrage, we need to check if the cross exchange rate matches the actual exchange rate.

Using the given spot rates, we can calculate the cross exchange rates as:

S$/CD = S$/$ ÷ CD/$ = 1.60 ÷ 1.33 = 1.203

Comparing this to the given S$/CD rate of 1.15, we can see that there is a discrepancy – the cross exchange rate suggests that the Singapore dollar is undervalued relative to the Canadian dollar.

To take advantage of this discrepancy, we can execute the following trades:

- Buy $1,000,000 and convert it to S$: $1,000,000 × 1.60 = S$1,600,000 
- Use the S$1,600,000 and convert it to Canadian dollars: S$1,600,000 ÷ 1.203 = CD1,329,198.40 
- Finally, use the CD1,329,198.40 to buy U.S. dollars: CD1,329,198.40 × 0.75 = $996,898.80

We started with $1,000,000 and ended up with $996,898.80, so our profit is:

Profit = $996,898.80 – $1,000,000 = -$3,101.20

Therefore, the correct answer is D) $46,093 profit.

The Singapore Dollar-U