Question
1. Suppose you observe the following exchange rates: S($/) = .85; S($/) = 1.60; and S(/) = 2.00. How can you make money? a .
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
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started