Question

In: Finance

The Table below provides quotes from three Banks A,B, and C for the British Pound in...

The Table below provides quotes from three Banks A,B, and C for the British Pound in U.S. dollars (A), the US dollar in Euros (B) and the British Pound in Euros (C).

Bid price Ask price

A - USD/POUND 1.4871 1.4900

B - EURO/USD 0.8794 0.8852

C - EUR/POUND 1.3050 1.3062

(a) Calculate the appropriate EUR/POUND bid and -ask cross exchange rates.

(b) Give your answers to (a), which currency is overvalued? Explain your answer.

(c) Assuming no other trading costs, explain if there are arbitrage opportunities for a US dealer with US$800,000. If there are no arbitrage opportunities explain why.

Solutions

Expert Solution

Arbitarge opportunity exists when the appropriate quotation is either more or less than the actual quotation of the currencies.


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