Welcome to lecture 15 of International Finance. we are going to continue our for future reference that this is called also called the intrinsic
value price or we need to use the cost price. So, moving forward towards the realignment discussion on the topic of international arbitrage. So,
moving toward the contents, we have already due to triangular arbitrage, but realignment means is that somehow the prices, the triangular
arbitrage and what do we mean by intrinsic value is a true value this value should prevail in the market, [00:16.500 --> 00:23.580] explored the
idea of triangular arbitrage. What triangular arbitrage is we have discussed these investors exploiting this triangular arbitrage, othering profit
from this triangular but rather in the market we have this . Now you would also have noticed that in our previous classes that it is a concept
where an investor can earn a risk less profit by [20:24.480 --> 20:32.800] arbitrage would create some kind of changes in the exchange rates in a
way that the triangular [10:29.560 --> 10:34.640] instead of using ask price we have used the bid price series it also does not matter whichever
[20:32.800 --> 20:39.280] arbitrage would be no more feasible for the future investors. So, first if we go back, [00:34.740 --> 00:43.600] involving
in different exchange rates. So, we discussed that there is a cross exchange rate and [10:34.640 --> 10:41.460] price series you use you either
use bid or ask for this first step to see to find out whether [20:39.680 --> 20:42.500] what are people doing? They are selling dollars and buying
the pounds. [10:41.460 --> 10:48.040] time will or will not exist or not and that will be perfectly fine. So, we are done with the first [00:43.600 -->
00:48.300] if the quoted cross exchange rate is different from the calculated cross exchange rate we have [20:44.280 --> 20:53.760] So, if
people are selling dollars that would increase its ask price of pound with respect to [10:48.040 --> 10:53.260] and the first step was whether the
time will or will not exist or not and we have calculated [00:48.500 --> 00:56.620] opportunity of triangular arbitrage and we can exploit this
opportunity the investor can earn [20:53.760 --> 21:00.940] dollars. Obviously, the the demand of pound had increased. So, when the demand of
pound had [10:53.260 --> 10:57.900] cross exchange rate and the calculated cross exchange rate is 8 and the quoted cross exchange
[00:56.620 --> 01:04.560] risk less profit by converting the amount into three different exchange rates. We have already [10:57.900 --> 11:07.900]
rate is 8.1. So, they obviously are different. So, calculated is 8 and quoted is 8.1. So, [21:00.940 --> 21:08.280] increased, the bank, bank's price
of the pound, right, it is a exchange rate also increase. [01:04.560 --> 01:14.240] discussed it and we are going to we are just going to see how
different examples of triangular [11:08.020 --> 11:12.580] when they are different we say that then time will or will touch it. So, in this example,
[21:09.680 --> 21:14.600] Similarly, in next step, what investors are doing is converting pounds, selling the [11:13.300 --> 11:20.300] let us do it.
So, step 2 is to decide the path of the currency conversion. [01:14.240 --> 01:23.160] arbitrage can be solved. So, once we we we we look at
different examples then we will see the idea [21:14.600 --> 21:20.640] pounds into a relation and then buying the relation ranges that would
incur a downward [21:20.640 --> 21:25.440] pressure on the relation. We get airport pressure on, sorry, double pressure on the [11:22.100 -->
11:29.740] Remember it is a triangular arbitrage. So, the name comes from a triangle we have three different [01:23.160 --> 01:29.700] of a real
alignment in the exchange rate. What does real alignment means that once we know there [21:25.440 --> 21:30.420] pounds and airport
pressure on the relation ranges and similar would happen here. [01:29.700 --> 01:34.760] is triangular arbitrage the investors try to exploit that
triangular arbitrage opportunity [11:29.740 --> 11:42.560] currencies we have in this case permission then get the pound and dollar. So, we need
to decide [21:31.020 --> 21:34.360] So, what this arbitrage realignment would do is that [01:35.800 --> 01:42.500] then there is an equilibrium
rate in the exchange rate in a way that the triangular arbitrage would [21:36.620 --> 21:43.740] that it would force the exchange rate into
equilibrium and what do we mean by equilibrium here? [11:42.560 --> 11:49.320] I mean we always start with dollars because we currently have
dollars in question we have [01:42.500 --> 01:51.560] no more exist for the future investors. So, this is what we are going to discuss and
, obviously we [21:44.180 --> 21:52.160] We mean that investors taking the advantage of triangular arbitrage would really [11:49.320 -->
11:57.120] given that we currently have 1000 dollars. So, we start with dollars but we have two options [01:51.560 --> 01:57.740] are going to
discuss some more examples on triangular arbitrage. So, let us start with with an example [21:53.400 --> 22:01.240] towards a situation where
future investors would not take any advantage from the change in the [11:57.120 --> 12:02.400] either we convert dollars into pounds or we
convert dollars into Malaysian ingot. So, [01:59.860 --> 02:10.200] we have a value of British pound in terms of dollars right. So, we so so so in
previous examples [22:01.240 --> 22:06.920] crisis. So, in simple words, the triangular arbitrage would cease to exist for future investors.
[12:02.440 --> 12:07.880] the first part can become that we convert the dollars into pounds then the pounds into Malaysian [12:07.880 -->
12:14.700] ingots and the Malaysian ingots into dollars. So, this let us call this path one. So, [22:09.740 --> 22:14.400] Okay, one last question I
am just going to discuss it over here. I would leave it [02:10.200 --> 02:17.840] on triangular arbitrage that we discussed in previous classes we
saw that there was just [12:14.880 --> 12:20.580] dollars into pounds, pounds into Malaysian ingots and then Malaysian ingots in back into
dollars. [22:15.500 --> 22:23.080] for you people to solve. It is question number 32 on page 211 of your book which is [02:17.840 --> 02:24.520]
one rate of triangular arbitrage I mean there was just one rate there was no bid rate or there was [12:21.080 --> 12:26.360] Or what we can do is
we again start with dollars we convert into Malaysian ingots [02:24.520 --> 02:34.540] no ask exchange rate. We have already discussed what
bid price is and what ask is bid is the buying [22:24.480 --> 22:31.900] International Finance by Jeff Madora. In this specific question, we do not
explicitly given [12:26.360 --> 12:34.240] then Malaysian ingots into pounds and then pounds into dollars. So, we convert we complete our
triangle [22:31.900 --> 22:37.020] the ask or bid price. Rather, we have given the statements that we need to convert into bid and ask [02:34.540
--> 02:47.640] price right the buying price of of the bank or the exchange from home [12:34.960 --> 12:41.220] and hence we have our second
path which is start with dollars into Malaysian ingot, [22:37.020 --> 22:44.020] price. So, what you need to do is you need to form two columns,
one is for the bid price and the [12:41.480 --> 12:46.800] then pounds and then dollar ingot. Now the question is which path should we choose
[22:44.020 --> 22:47.160] second is for the ask price and we are just going to fill these columns. [12:46.800 --> 12:54.860] either we choose path
one or path two two and only one path of these two would give us profit. [22:49.140 --> 22:56.500] The first exchange rate is you can buy a euro
for 14 passes. Obviously, if we can buy the euro [02:49.500 --> 02:58.900] to whom we are going to sell the currency and the ask price is the
selling price [12:55.260 --> 13:03.280] The another path would always lead towards loss. So, there are two ways to choose between these two
[22:56.500 --> 23:03.160] for 14 passes, that means bank is selling euro for 14 passes. So, [03:01.280 --> 03:13.100] of the exchange. So, now
we have in this example this is the real kind of a situation you know when [13:03.280 --> 13:10.580] paths. One is the trial hit method that is we
calculate the profit loss of path one, [23:06.720 --> 23:26.980] the selling price of euro for the bank is 14 passes. So, that means the bank would
sell euro [13:10.900 --> 13:19.980] the profit loss of path two and see which path gives us profit and then use that specific path [03:13.100 -->
03:21.520] when you walk into an exchange or a bank to to buy some currency you would rather having one [13:19.980 --> 13:28.060] and apply
it and do the currency conversions. But that obviously is a tedious task. So, [03:21.520 --> 03:27.840] rate you would have two rates that would
be ask rate and the bid rate. So, in previous examples for [23:27.540 --> 23:37.000] for 14 passes. So, that becomes the bank's ask price.
Remember, this is the selling price of [03:27.840 --> 03:32.420] the sake of simplicity and before for the sake of understanding triangular
arbitrage [13:28.060 --> 13:34.280] what we have done is we have came up with a formula. It says that when calculated cross [03:32.420 -->
03:38.540] we just used one rate there was no concept of bid or ask prices in our previous classes [13:34.280 --> 13:40.740] exchange rate is
value price or we need to use the cost price. So, moving forward towards the realignment discussion on the topic of international arbitrage. So,
moving toward the contents, we have already due to triangular arbitrage, but realignment means is that somehow the prices, the triangular
arbitrage and what do we mean by intrinsic value is a true value this value should prevail in the market, [00:16.500 --> 00:23.580] explored the
idea of triangular arbitrage. What triangular arbitrage is we have discussed these investors exploiting this triangular arbitrage, othering profit
from this triangular but rather in the market we have this . Now you would also have noticed that in our previous classes that it is a concept
where an investor can earn a risk less profit by [20:24.480 --> 20:32.800] arbitrage would create some kind of changes in the exchange rates in a
way that the triangular [10:29.560 --> 10:34.640] instead of using ask price we have used the bid price series it also does not matter whichever
[20:32.800 --> 20:39.280] arbitrage would be no more feasible for the future investors. So, first if we go back, [00:34.740 --> 00:43.600] involving
in different exchange rates. So, we discussed that there is a cross exchange rate and [10:34.640 --> 10:41.460] price series you use you either
use bid or ask for this first step to see to find out whether [20:39.680 --> 20:42.500] what are people doing? They are selling dollars and buying
the pounds. [10:41.460 --> 10:48.040] time will or will not exist or not and that will be perfectly fine. So, we are done with the first [00:43.600 -->
00:48.300] if the quoted cross exchange rate is different from the calculated cross exchange rate we have [20:44.280 --> 20:53.760] So, if
people are selling dollars that would increase its ask price of pound with respect to [10:48.040 --> 10:53.260] and the first step was whether the
time will or will not exist or not and we have calculated [00:48.500 --> 00:56.620] opportunity of triangular arbitrage and we can exploit this
opportunity the investor can earn [20:53.760 --> 21:00.940] dollars. Obviously, the the demand of pound had increased. So, when the demand of
pound had [10:53.260 --> 10:57.900] cross exchange rate and the calculated cross exchange rate is 8 and the quoted cross exchange
[00:56.620 --> 01:04.560] risk less profit by converting the amount into three different exchange rates. We have already [10:57.900 --> 11:07.900]
rate is 8.1. So, they obviously are different. So, calculated is 8 and quoted is 8.1. So, [21:00.940 --> 21:08.280] increased, the bank, bank's price
of the pound, right, it is a exchange rate also increase. [01:04.560 --> 01:14.240] discussed it and we are going to we are just going to see how
different examples of triangular [11:08.020 --> 11:12.580] when they are different we say that then time will or will touch it. So, in this example,
[21:09.680 --> 21:14.600] Similarly, in next step, what investors are doing is converting pounds, selling the [11:13.300 --> 11:20.300] let us do it.
So, step 2 is to decide the path of the currency conversion. [01:14.240 --> 01:23.160] arbitrage can be solved. So, once we we we we look at
different examples then we will see the idea [21:14.600 --> 21:20.640] pounds into a relation and then buying the relation ranges that would
incur a downward [21:20.640 --> 21:25.440] pressure on the relation. We get airport pressure on, sorry, double pressure on the [11:22.100 -->
11:29.740] Remember it is a triangular arbitrage. So, the name comes from a triangle we have three different [01:23.160 --> 01:29.700] of a real
alignment in the exchange rate. What does real alignment means that once we know there [21:25.440 --> 21:30.420] pounds and airport
pressure on the relation ranges and similar would happen here. [01:29.700 --> 01:34.760] is triangular arbitrage the investors try to exploit that
triangular arbitrage opportunity [11:29.740 --> 11:42.560] currencies we have in this case permission then get the pound and dollar. So, we need
to decide [21:31.020 --> 21:34.360] So, what this arbitrage realignment would do is that [01:35.800 --> 01:42.500] then there is an equilibrium
rate in the exchange rate in a way that the triangular arbitrage would [21:36.620 --> 21:43.740] that it would force the exchange rate into
equilibrium and what do we mean by equilibrium here? [11:42.560 --> 11:49.320] I mean we always start with dollars because we currently have
dollars in question we have [01:42.500 --> 01:51.560] no more exist for the future investors. So, this is what we are going to discuss and
, obviously we [21:44.180 --> 21:52.160] We mean that investors taking the advantage of triangular arbitrage would really [11:49.320 -->
11:57.120] given that we currently have 1000 dollars. So, we start with dollars but we have two options [01:51.560 --> 01:57.740] are going to
discuss some more examples on triangular arbitrage. So, let us start with with an example [21:53.400 --> 22:01.240] towards a situation where
future investors would not take any advantage from the change in the [11:57.120 --> 12:02.400] either we convert dollars into pounds or we
convert dollars into Malaysian ingot. So, [01:59.860 --> 02:10.200] we have a value of British pound in terms of dollars right. So, we so so so in
previous examples [22:01.240 --> 22:06.920] crisis. So, in simple words, the triangular arbitrage would cease to exist for future investors.
[12:02.440 --> 12:07.880] the first part can become that we convert the dollars into pounds then the pounds into Malaysian [12:07.880 -->
12:14.700] ingots and the Malaysian ingots into dollars. So, this let us call this path one. So, [22:09.740 --> 22:14.400] Okay, one last question I
am just going to discuss it over here. I would leave it [02:10.200 --> 02:17.840] on triangular arbitrage that we discussed in previous classes we
saw that there was just [12:14.880 --> 12:20.580] dollars into pounds, pounds into Malaysian ingots and then Malaysian ingots in back into
dollars. [22:15.500 --> 22:23.080] for you people to solve. It is question number 32 on page 211 of your book which is [02:17.840 --> 02:24.520]
one rate of triangular arbitrage I mean there was just one rate there was no bid rate or there was [12:21.080 --> 12:26.360] Or what we can do is
we again start with dollars we convert into Malaysian ingots [02:24.520 --> 02:34.540] no ask exchange rate. We have already discussed what
bid price is and what ask is bid is the buying [22:24.480 --> 22:31.900] International Finance by Jeff Madora. In this specific question, we do not
explicitly given [12:26.360 --> 12:34.240] then Malaysian ingots into pounds and then pounds into dollars. So, we convert we complete our
triangle [22:31.900 --> 22:37.020] the ask or bid price. Rather, we have given the statements that we need to convert into bid and ask [02:34.540
--> 02:47.640] price right the buying price of of the bank or the exchange from home [12:34.960 --> 12:41.220] and hence we have our second
path which is start with dollars into Malaysian ingot, [22:37.020 --> 22:44.020] price. So, what you need to do is you need to form two columns,
one is for the bid price and the [12:41.480 --> 12:46.800] then pounds and then dollar ingot. Now the question is which path should we choose
[22:44.020 --> 22:47.160] second is for the ask price and we are just going to fill these columns. [12:46.800 --> 12:54.860] either we choose path
one or path two two and only one path of these two would give us profit. [22:49.140 --> 22:56.500] The first exchange rate is you can buy a euro
for 14 passes. Obviously, if we can buy the euro [02:49.500 --> 02:58.900] to whom we are going to sell the currency and the ask price is the
selling price [12:55.260 --> 13:03.280] The another path would always lead towards loss. So, there are two ways to choose between these two
[22:56.500 --> 23:03.160] for 14 passes, that means bank is selling euro for 14 passes. So, [03:01.280 --> 03:13.100] of the exchange. So, now
we have in this example this is the real kind of a situation you know when [13:03.280 --> 13:10.580] paths. One is the trial hit method that is we
calculate the profit loss of path one, [23:06.720 --> 23:26.980] the selling price of euro for the bank is 14 passes. So, that means the bank would
sell euro [13:10.900 --> 13:19.980] the profit loss of path two and see which path gives us profit and then use that specific path [03:13.100 -->
03:21.520] when you walk into an exchange or a bank to to buy some currency you would rather having one [13:19.980 --> 13:28.060] and apply
it and do the currency conversions. But that obviously is a tedious task. So, [03:21.520 --> 03:27.840] rate you would have two rates that would
be ask rate and the bid rate. So, in previous examples for [23:27.540 --> 23:37.000] for 14 passes. So, that becomes the bank's ask price.
Remember, this is the selling price of [03:27.840 --> 03:32.420] the sake of simplicity and before for the sake of understanding triangular
arbitrage [13:28.060 --> 13:34.280] what we have done is we have came up with a formula. It says that when calculated cross [03:32.420 -->
03:38.540] we just used one rate there was no concept of bid or ask prices in our previous classes [13:34.280 --> 13:40.740] exchange rate is
