Assume the following information for a bank quoting on spot exchange rates:
$$\begin{array} { l l r }
\text { Exchange rate of Singapore dollar in U.S. S } & = & \$ .60 \
\text { Exchange rate of pound in U.S. S } & = & \$ 1.50 \
\text { Exchange rate of pound in Singapore dollars } & = & \text { S } \$ 2.6
\end{array}$$
Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?
A) The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.
B) The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.
C) The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate.
D) The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate.

Question

Assume the following information for a bank quoting on spot exchange rates:
$$\begin{array} { l l r } 
\text { Exchange rate of Singapore dollar in U.S. S } & = & \$ .60 \
\text { Exchange rate of pound in U.S. S } & = & \$ 1.50 \
\text { Exchange rate of pound in Singapore dollars } & = & \text { S } \$ 2.6
\end{array}$$
Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?
A) The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.
B) The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.
C) The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate.
D) The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate.

Quizplus · Accepted Answer

We can perform triangular arbitrage to determine if there are any arbitrage opportunities available in the market.

Let's start with $1:
- Convert $1 to Singapore dollars: $1 * 1 / 0.6 = S\$ 1.67
- Convert Singapore dollars to pounds: S\$ 1.67 * 2.6 = £4.34
- Convert pounds back to U.S. dollars: £4.34 * 1.5 = $6.51

We started with $1 and ended up with $6.51, which is greater than $1. Therefore, there is an arbitrage opportunity available in the market. Traders will take advantage of this by selling U.S. dollars, buying Singapore dollars, selling Singapore dollars, and buying pounds. This increased demand for Singapore dollars will cause their value to appreciate, while the increased supply of pounds will cause their value to depreciate. As a result, the Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate. Therefore, the best choice is B.

Assume the Following Information for a Bank Quoting on Spot