Assume that the yen/dollar exchange rate quoted in London at 3 p.m.is ×120 = $1,and the New York yen/dollar exchange rate at the same time (10 a.m.New York time)is ×123 = $1.Which of the following transactions would yield immediate profit?

Question

Quizplus · Accepted Answer

The difference in exchange rates between London and New York indicates a potential for arbitrage. To take advantage of the difference, an investor could buy yen in London at the rate of ×120/$1, and immediately sell them in New York at the rate of ×123/$1, earning a profit of $3 for every yen exchanged. This type of arbitrage is known as triangular arbitrage. None of the other transactions mentioned would necessarily yield immediate profit in this scenario.

Assume That the Yen/dollar Exchange Rate Quoted in London at 3