Suppose the Japanese yen exchange rate is 114 = $1, and the British pound exchange rate is

Question:

Suppose the Japanese yen exchange rate is ¥114 = $1, and the British pound exchange rate is £1 = $1.26.

a. What is the cross-rate in terms of yen per pound?

b. Suppose the cross-rate is ¥147 = £1. Is there an arbitrage opportunity here? If there is, explain how to take advantage of the mispricing and the potential arbitrage profit. What is your arbitrage profit per dollar used?

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...

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