Question13 The following table contains the spot rates for selected currencies:[table]
Bank | BID | ASK Bank A | JPY100/AUD | JPY110/AUD Bank B | USD0.65/AUD | USD0.67/AUD Bank B | USD0.007/JPY | USD0.008/JPY
[/table] Which of the following statements is true? Select one alternative: a. There is no arbitrage opportunity. b. There is an arbitrage opportunity for us to buy JPY using AUD from Bank A and sell those JPY to Bank B. c. There is an arbitrage opportunity for us to buy JPY using AUD from Bank B and sell those JPY to Bank A. d. None of the above. ResetMaximum marks: 1 Flag question undefined

Question

BlackTom AI · Accepted Answer

Bank quotes imply the prices at which the bank buys (bid) and sells (ask) a currency. Use the appropriate bid or ask depending on whether you are selling or buying that currency.

Step 1 — AUD → JPY at Bank A
- Bank A quotes JPY100/AUD (bid) and JPY110/AUD (ask).
- If you sell AUD to Bank A (you give AUD, receive JPY), you transact at the bank’s bid: 1 AUD → 100 JPY.

Step 2 — JPY → USD at Bank B
- Bank B quotes USD0.007/JPY (bid) and USD0.008/JPY (ask).
- If you sell JPY to Bank B (you give JPY, receive USD), you receive the bank’s bid: 100 JPY × USD0.007/JPY = USD0.700.

Step 3 — USD → AUD at Bank B
- Bank B quotes USD0.65/AUD (bid) and USD0.67/AUD (ask).
- To convert USD into AUD you must buy AUD from the bank, so you pay the ask (USD0.67 per AUD). Thus AUD received = USD0.700 / (USD0.67/AUD) = 1.044776… AUD.

Net result: start with 1 AUD and end with ≈1.04478 AUD, a profit of ≈0.04478 AUD (≈4.48%). Therefore an arbitrage opportunity exists by buying JPY with AUD at Bank A and selling those JPY to Bank B.

Why other options are incorrect
- (a) “No arbitrage” is false because the calculation above shows a positive loop profit.
- (c) Buying JPY with AUD from Bank B and selling to Bank A: check quickly — 1 AUD sold to Bank B at its USD/AUD bid yields USD0.65 → buy JPY at Bank B’s JPY ask USD0.008/JPY gives 81.25 JPY → sell JPY to Bank A to get AUD at Bank A’s ask JPY110/AUD yields 81.25/110 = 0.73977 AUD, a loss. So (c) is not an arbitrage.
- (d) is wrong because option (b) is true.

Conclusion: The correct statement is b. There is an arbitrage opportunity for us to buy JPY using AUD from Bank A and sell those JPY to Bank B. This matches the provided answer (b).

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