Explanation:
To determine if arbitrage is possible, we need to calculate the implied EUR/USD cross rate from the interbank market and compare it with the dealer's quote.
Step 1: Calculate implied EUR/USD from interbank rates
We have:
To get EUR/USD (EUR per USD), we use: EUR/USD = (DKK/USD) / (DKK/EUR)
Bid rate (EUR/USD): Use the bid for DKK/USD and ask for DKK/EUR Bid = 7.0820 / 7.4679 = 0.9482
Ask rate (EUR/USD): Use the ask for DKK/USD and bid for DKK/EUR Ask = 7.0870 / 7.4524 = 0.9511
So the implied EUR/USD cross rate from interbank is: 0.9482/0.9511
Step 2: Compare with dealer's quote
Dealer's quote: 0.9483/0.9510
This means the dealer is offering slightly better rates than the interbank market, so there's no arbitrage opportunity. The trader would not make any arbitrage profits.
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Note: DKK/EUR is the amount of DKK per 1 EUR. DKK/USD is the amount of DKK per 1 USD.
If a dealer quoted a bid-offer of 0.9483/0.9510 for EUR/USD, a trader would most likely:
A
not make any arbitrage profits.
B
make arbitrage profits by buying USD from the dealer with EUR and selling it in the interbank market.
C
make arbitrage profits by buying EUR from the dealer with DKK and selling it in the interbank market.
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