Exchange arbitrage is the activity that unifies the foreign exchange market spatially. That is, it assures that the same exchange rates tend to rule at any moment in time,

whether they are quoted by a London bank, a New York bank, or a Singapore bank.

Many markets feature the activity known as arbitrage. It is defined as buying a commodity where it is cheap and simultaneously selling it where it is expensive.

Forexample, two cooperating scalpers at opposite ends of a football field will be able to engage in arbitrage if ticket prices happen to differ, and if they can

communicate with each other, say via walkie-talkies. An example of exchange arbitrage that is fully analogous to scalping football tickets is easily understood. If the

dollar price of pounds quoted by New York banks is less than the price quoted by London banks, one can buy pounds in New York with dollars, sell them

simultaneously to London banks and make a profit. In a three-point exchange arbitrage, exchange rates for three foreign currencies will be quoted differently by banks

in two different markets. This enables the scalper-arbitragers to engage in exchange arbitrage and make profits.

You are given exchange rates for three currencies-the U.S. dollar, the British pound, and the Swiss franc-quoted by banks in New York, London and Zurich as

follows:

Suppose that you have $1,000,000.00 and want to make a profit by engaging in exchange arbitrage. Where is the opportunity for profit via exchange arbitrage? How

would an exchange arbitrager realize the profit-what would be the mechanics? Explain your answers and determine the amount of the profit.

When all of the gains from arbitrage have been exhausted, will the dollar price of pounds be higher or lower? Will the dollar price of Swiss francs be higher or lower?

Will the pound price of Swiss francs be higher or lower?

What condition in foreign exchange markets is guaranteed by this "triangular arbitrage?"