1. Suppose the Japanese yen exchange rate is 130.56 = $1, and the British pound exchange rate is 1 = $1.20.

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

b. Suppose the cross-rate is 150 = 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?

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