1 Question 3 a) You go to a bank and are given these quotes: Euro in S Pesos in S Euro in pesos Bid 1.11 $.10 13 Ask 1.25 $.11 14 You have $1,000. Can you use triangular arbitrage to generate a profit? If so, explain the order of the transactions that you would execute, and the profit that you would earn. If you cannot earn a profit from triangular arbitrage, explain why. (15 Marks) b) Explain the role played by arbitrageurs in the foreign currency market. (5 Marks) b) Assume the following information: Spot rate of Mexican peso = $.100 180-day forward rate of Mexican peso = $.098 180-day Mexican interest rate = 6% 180-day U.S. interest rate = 5% Given this information, is covered interest arbitrage worthwhile for Mexican investors who have pesos to invest? Explain your answer. (10 Marks)