Bonus point solution

Citibank (per USD)

Australian Dollar AUD 1.2930

Canadian Dollar CAD 1.2635

Common Wealth (per AUD)

US Dollar USD 0.7434

Euro EUR 0.6271

Canadian Dollar CAD 0.9221

HSBC (per CAD)

Australian Dollar AUD 1.0529

Euro EUR 0.6974

US Dollar USD 0.8192

1. SCENARIO 1:

Citibank: AUD1.2930/$

Common Wealth: CAD0.9221/AUD

HSBC: $0.8192/CAD

A. Step 1: Cross rate calculation:

1
1.2930
$/CAD: cross rate = =$0.8387/CAD
0.9221

1
0.9221
AUD/$: cross rate = =AUD1.3238/$
0.8912

1
0.8192
CAD/AUD: cross rate = = CAD0.9441/AUD
1.2930

B. Step 2 & 3: compare the cross rate to the quoted rate and arbitrage

There are differences between the cross rates and the quoted rates.
 1. Citibank: AUD1.2930/$

Common Wealth: CAD0.9221/AUD

HSBC: $0.8192/CAD
1
1.2930
$/CAD: cross rate = =$0.8387/CAD
0.9221

End with $1,023,843 Citibank Start with $1,000,000

(6) Trader sells $1,000,000 to HSBC
(3) Trader receives $1,023,843
at $0.8192/CAD

Common Wealth Bank

HSBC
(1) Trader receives AUD1,328,829
(2) Trader sells AUD1,328,829 to Citibank at (4) Trader receives CAD1,220,703
AUD
1.2930/$ (5) Trader sells CAD1,220,703 to Common
Wealth Bank at CAD0.9221/AUD

2. Citibank: AUD1.2930/$

Common Wealth: CAD0.9221/AUD

HSBC: $0.8192/CAD
1
0.9221
AUD/$: cross rate = =AUD1.3238/$
0.8912

End with AUD1,023,843 Common Start with AUD1,000,000

Wealth Bank
(5) Trader sells AUD1,000,000 to
(6) Trader receives AUD1,023,843
Citibank at AUD1.2930/$

HSBC
(1) Trader receives CAD944,086 Citibank
(2) Trader sells CAD944,086 to Common
(3) Trader receives $773,395.2
Wealth Bank at CAD0.9221/AUD (4) Trader sells $773,395.2 to HSBC at
$0.8192/CAD
 3. Citibank: AUD1.2930/$

Common Wealth: CAD0.9221/AUD

HSBC: $0.8192/CAD
1
0.8192
CAD/AUD: cross rate = = CAD0.9441/AUD
1.2930

End with CAD1, 023,843 HSBC Start with CAD1,000,000

(6) Trader receives CAD1,023,843 (5) Trader sells CAD1,000,000 to

Common Wealth Bank at
CAD
0.9221/AUD

Citibank
(1) Trader receives $838,732.5 Common Wealth Bank
(2) Trader sells $838,732.5 to HSBC at
(3) Trader receives AUD1,084,481
$0.8192/CAD (4) Trader sells AUD1,084,481 to Citibank at
AUD
1.2930/$
2. SCENARIO 2:
Citibank: CAD1.2635/$

Common Wealth: $0.7434/AUD

HSBC: AUD1.0529/CAD

A. Step 1: Cross rate calculation:

1
1.2635
AUD/CAD: cross rate = = AUD1.0646/CAD
0.7434

1
1.2635
$/AUD: cross rate = =$0.7517/AUD
1.0529

1
CAD/$: cross rate = 0.7434 ∗1.0529 = CAD1.2776/$

B. Step 2 & 3: compare the cross rate to the quoted rate and arbitrage
1. Citibank: CAD1.2635/$

Common Wealth: $0.7434/AUD

 HSBC: AUD1.0529/CAD
1
1.2635
AUD/CAD: cross rate = = AUD1.0646/CAD
0.7434

End with AUD1,011,149 Common Start with AUD1,000,000

Wealth Bank
(5) Trader sells AUD1,000,000 to
(6) Trader receives AUD1,011,149
HSBC at AUD1.0529/CAD

Citibank
HSBC
(1) Trader receives $751,688
(2) Trader sells $751,688 to Common (3) Trader receives CAD949,757.8
Wealth Bank at $0.7434/AUD (4) Trader sells CAD949,757.8 to Citibank at
CAD
1.2635/$

2. Citibank: CAD1.2635/$

Common Wealth: $0.7434/AUD

HSBC: AUD1.0529/CAD
1
1.2635
$/AUD: cross rate = =$0.7517/AUD
1.0529

End with $1,011,149 Citibank Start with $1,000,000

(6) Trader receives $1,011,149 (5) Trader sells $1,000,000 to

Common Wealth Bank at
$0.7434/AUD

HSBC
Common Wealth Bank
(1) Trader receives CAD1,277,587
(2) Trader sells CAD1,277,587 to Citibank at (3) Trader receives AUD1,345,171
CAD
1.2635/$ (4) Trader sells AUD1,345,171 to HSBC at
AUD
1.0529/CAD
 3. Citibank: CAD1.2635/$

Common Wealth: $0.7434/AUD

HSBC: AUD1.0529/CAD
1
CAD/$: cross rate = 0.7434 ∗1.0529 = CAD1.2776/$

End with CAD1,011,149 HSBC Start with CAD1,000,000

(5) Trader sells CAD1,000,000 to

(7) Trader receives CAD1,011,149
Citibank at CAD1.2635/$

Common Wealth Bank

(1) Trader receives AUD1,064,639 Citibank
(2) Trader sells AUD1,064,639 to HSBC at
AUD
(3) Trader receives $791,452.3
1.0529/CAD (4) Trader sells $791,452.3 to Common
Wealth Bank at $0.7434/AUD