1.The price of a Grande Cafe Latte in Starbucks in New York City is $6.00 and the price of the same sized Cafe Latte in Starbucks in London is 5.00 pounds. According to the absolute PPP, the dollar/pound exchange rate is ________ and if the market rate is $1.30/pound, the dollar is ___________.

• A. $1.20; undervalued.
• B. $1.20; overvalued.
• C. $0.83; overvalued
• D. $0.83; undervalued.

2. The following are the exchange rates in three financial centers: X: $1 = 25 Pesos; Y: 1 Euro = 30 Pesos; Z: $1.10 = 1 Euro. An arbitrageur will

• A. buy Pesos and sell $ in X.
• B. sell Pesos and buy Euros in Y.
• C. buy $ and sell Euros in Z.
• D. buy Pesos and sell Euros in Y

3. The profit rate if currencies are exchanged at the rates given in the above question will be

• . A. 10%
• B. 9.09%
• C. 16.67%
• D. 6.25%