Assume that back in 1995 the pound sterling is worth FF9.80 in Paris and SFr5.40 in Zurich.

a. Show how British arbitrageurs can make profits given that the Swiss franc is worth two French francs. What would be the profit per pound transacted?

b. What would be the eventual outcome on exchange rates in Paris and Zurich given these arbitrage activities?

c. Rework 8.a, assuming that transaction costs amount to 0.6% of the amount transacted. What would be the profit per pound transacted?

d. Suppose the Swiss franc is quoted at FF2 in Zurich. Given a transaction cost of 0.6% of the amount transacted, what are the minimum/maximum French franc prices for the Swiss franc that you would expect to see quoted in Paris?