Answer to Question #99616 in Financial Math for SCHAFFER ODHIAMBO ODEWA

Question

Consider two Tanzanian Banks, A and B, with the following quotes which are expressed as Ksh/Tsh.

Bank A Bank B
Tsh quote Bid Ask Bid Ask
Ksh0.06 Ksh.0.07 Ksh 0.08 Ksh0.09
Required
Compute the gain from locational arbitrage to a Tanzanian investor with Kshs.30 million to invest (5 marks)

Answer 1

The gain is:

Gain = (Bid B - Ask A)×Investment = (0.08 - 0.07)×5,000,000 = Kshs 500,000.