Question: Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting €0.7309/$1.00 and Credit Suisse is offering SF0.9731/$1.00. You learn that UBS is making a direct market between the Swiss franc and the Euro, with a current €/SF quote of 0.73.
a. Show how you can make a triangular arbitrage profit by trading at these prices. (Ignore bid-ask spreads for this problem.) Assume you have $5,000,000 with which to conduct the arbitrage.
b. What happens if you initially sell dollars for Swiss francs?
c. What €/SF price will eliminate triangular arbitrage?