1. Suppose that you work for the CFO of the James Company. The James Company does business in both U.S. dollars and in Polish zloty, so it regularly carries bank account balances in both currencies. The James Company observes differences in spot exchange rates for the zloty in terms of U.S. dollars at the two banks it regularly uses, and is considering whether it should try to profit from arbitrage.

	Alpha Bank	Beta Bank
Bid	$0.224	$0.228
Ask	$0.227	$0.229

a. (8 points) James Companys CFO has approved using either $100,000 or 400,000 zloty for arbitration profits using Alpha Bank and Beta Bank. What profits, if any, can James Company make using these funds for arbitrage, if it moves quickly before exchange rates adjust?

b. (6 points) The locational arbitrage opportunity described in question 1.a. will disappear fairly quickly after it is detected. Why does that happen, and how will the market adjust at each bank?

c. (8 points) The James Company CFO has also approved using another $100,000, 400,000 zloty, or 1 million Turkish lira for you to use in triangular arbitrage using dollars, zloty, or lira. You notice that that the spot rates you used for part a. have not adjusted, so the bid and ask rates from part a are still available. For the Turkish lira, all of the banks you considered are all offering the following bid and ask prices. What profits (if any) can you make using locational arbitrage involving dollars, zloty, and lira, if the following are the current exchange rates for lira?

	Quoted Bid Price	Quoted Ask Price
Exchange Rate for Turkish lira in U.S. dollars	$0.085	$0.086
Exchange Rate for Polish zloty in Turkish lira	2.69 lira	2.70 lira