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.

jeff jeffy answered 1 year ago

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