Page 5 - FINAL CFA II SLIDES JUNE 2019 DAY 4

READING 11: CURRENCY EXCHANGE RATES: UNDERSTANDING EQUILIBRIUM VALUE

MODULE 11.1: FOREX QUOTES, SPREADS, AND TRIANGULAR
ARBITRAGE
Clockwise (starting with USD 1 million) -you are the arbitrageur!

1) USD to MXN:
Sell USD1m
@ 0.0935 USD/MXN (DIV) Buy MXN 10,695,187

2) MXN TO AUD:
Sell MXN 10,695,187
@ 6.3025 MXN/AUD (DIV) = Buy AUD 1,696,975
3) AUD TO USD:
Buy AUD 1,696,975
@ 0.600 USD/AUD (X)
= USD 1,018,185
A profit of USD 18,185.

MXN/AUD Bid for AUD Offer for AUD SPREAD
Counterclockwise (starting with USD 1 million)
Dealer Quoted Rates 6.3000 - 6.3025 0.0025 MXN per AUD
1) USD to AUD:
Sell USD1m
Cross Rates 6.4200 - 6.4481 0.0281 MXN per AUD
@ 0.06015 USD/AUD (DIV) Buy AUD 1,662,510
2) AUD TO MXN:
Sell AUD 1,662,510
@ 6.3000 MXN/AUD (DIV) = Buy MXN 10,473,814

3) MXN TO USD:
Sell MXN 10,473,814
@ 0.0933 USD/MXN (X)
= USD 977,207
A loss of USD 22,793.