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QUESTION 1 Use the following information to answer the next two questions. The peso/pound exchange rate...

QUESTION 1

  1. Use the following information to answer the next two questions.

    The peso/pound exchange rate is Mex$16/£ while the euro/pound exchange rate is €1.15/£ . You also observe that the actual peso/euro cross exchange rate is Mex$12/€ . Find the triangular arbitrage profit (in pounds) available to someone that has access to £3,000,000. Round intermediate steps to four decimals and your final answer to two decimals. Do not use the pound sign when entering your answer.

6.25 points   

QUESTION 2

  1. Which of the following would occur to eliminate the arbitrage opportunity?

    No changes are necessary.

    The pound will appreciate against the euro.

    The pound will appreciate against the peso.

    None of the above

6.25 points   

QUESTION 3

  1. Suppose a banker observed the following spot quotations for dollars and euros.

    Bank A: $1.0956-.62

    Bank B: $1.0958-.63

    Find the abritrage profit available (in terms of dollars) to a banker with 2 million dollars at her disposal. Round intermediate steps to four decimals and your final answer to two decimals.

    730.06

    1277.84

    182.45

    365.10

    0

6.25 points   

QUESTION 4

  1. Locational arbitrage is possible when:

    The bid price for a given currency in two locations is different.

    The ask price for a given currency in two locations is different.

    The bid price for a given curreny in one location is greater than the ask price in another location.

    The ask price for a given currency in one location is greater than the bid price in another location.

Solutions

Expert Solution

jeff jeffy answered 11 months ago
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