Question
1. Suppose the following exchange rates exist in various exchanges in the following cities:Berlin: /$ = 0.8000 or $/ = 1.2500 (So you could buy
1. Suppose the following exchange rates exist in various exchanges in the following cities:Berlin: /$ = 0.8000 or $/ = 1.2500 (So you could buy 1 GBP with 1.25 USD)London: /$ = 0.8333 or $/ = 1.2000New York: / = 0.9000 or / = 1.1111
a) Starting with dollars and ending with dollars, explain how you would engage in arbitrage to profit from these rates. What is the profit for each dollar initially used?
b) Assume that the rates in Berlin and New York stay constant. At the London exchange, would the dollar appreciate or depreciate as a result of the triangular arbitrage?
What would the /$ or $/ rate in London need to be (assuming the other rates remain constant) to eliminate the opportunity for triangular arbitrage?
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