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4
4. An investor has an amount of 20000$. He will invest in the exchange rate market at the quoted rates presented below: Do you find any discrepancy? Can this strategy be deemed as profitable? 15 points Value of Pound to USD Value of Ringgit to USD Value of Pound in Ringgit Quoted Bid Price 1.6 USD 0.200 USD 8.1 MYR Quoted Ask Price 1.61 USD 0.201 USD 8.2 MYR
Expert Solution
Step 1
There Is $20,000 available with the investor. The $20,000 has to be sold at the given exchange rate
$/pound = 1.60/1.61
So, pound inflow=$20,000/1.61=12,422.36 pound
Step 2
Now this 12,422.36 pound has to be sold at the given rate
MYR/POUND = 8.10 / 8.20
SO MYR inflow=12,422.36*8.10=MYR100,621.12
Step 3
Now this MYR 100,621.12 has to be sold at the given rate
$/MYR= 0.200/0.201
So$inflow = MYR 100,621.12*0.20=
= $ 20,124.224
So the arbitrage profit = 20,124.224-20,000
=$ 124.224
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