Question
1. (5pts) Exchange Rate Arbitrage : Suppose that you have $1,000,000 and you observe the following exchange rates: $1.25/1; 0.93/$1; and 0.90/1. (3pts) Is there
1. (5pts) Exchange Rate Arbitrage: Suppose that you have $1,000,000 and you observe the following exchange rates: $1.25/1; 0.93/$1; and 0.90/1.
(3pts) Is there an arbitrage opportunity? If so, explain how you would take advantage of it with your $1,000,000.
(2pts) If the exchange rate between the dollar and the other two currencies stays the same what will happen to the exchange rates between the and ? (show your work)
(6pts) Exchange Rates and Purchase Power Parity:
| Nominal ERfx/$ | Price of Basket | Price of US Basket ($200) in local currency terms | Real Exchange Rate in US
| According to PPP, will $ appreciate or depreciate? | |
| Norway (krone) | 8/$1 | 2000 Krone |
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| India (rupee) | 68/$1 | 10,000 rupees |
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| Mexico (pesos) | 20/$1 | 3500 rupees |
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| South Africa (rand) | 14/$1 | 3000 Rands |
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