1. Suppose you observe the following exchange rates: S($/) = .85; S($/) = 1.60; and S(/) = 2.00. How can you make money?

a. No arbitrage profit is possible.

b. Start with $1; Sell $ and buy at S($/) = .85; Sell and buy at S(/) = 2.00; Sell and buy $ at S($/) = 1.60.

c. Start with 1; Sell and buy at S(/) = 2.00; Sell and buy $ at S($/) = 1.60; Sell $ and buy at S($/) = .85.

d. Start with $1; Sell $ and buy at S($/) = 1.60; Sell and buy at S(/) = 2.00; sell and buy $ at S($/) = .85.

2. The Australian dollar (AUD)U.S. dollar spot exchange rate is S(AUD/USD) = 1.60, the Canadian dollar (CAD)U.S. dollar spot rate is S(CAD/USD) = 1.33 and the Australian and Canadian dollar spot rate is S(AUD/CAD) = 1.15. Determine the triangular arbitrage profit that is possible if you have 1,000,000 US dollars.

a. $46,093 loss

b. No profit is possible

c. $44,063 profit

d. $46,093 profit