As a foreign exchange trade at Deutsche Bank, one of your customers would like a yen quote on Australian dollars. The current spot market rates are ¥101.37-85/U.S.$ and A$1.2924-44/U.S.$
What bid and ask yen cross rates would you quote on spot Australian dollars?
What will be an ideal response?
Answer: By means of triangular arbitrage, you can calculate the market quotes for the Australian dollar in terms of yen as ¥78.31-81/A$. These prices can be found by conducting the following trades: For the yen bid price for the Australian dollar, you need to first sell Australian dollars for U.S. dollars and then sell the U.S. dollars for yen. It costs A$1.2924 to buy one U.S. dollar. With U.S.$ you can buy ¥101.37. Therefore, A$1.2944 = ¥101.37, or A4 = ¥78.31. This is the yen bid price for one Australian dollar. The yen ask price for the Australian dollar can be found by first selling yen for US$ and then using the US$ to buy Australian dollars. Given the quotes above, it costs ¥101.85 to buy one US$, which can be sold for A$1.2924 . Thus, A$1.2924 = ¥101.85 or A$ = ¥78.81 This is the yen ask price for the Australian dollar.
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