1.You observe the following exchange rate quotes:

$ 1.1210 / EUR

$ 1.2235/ GBP

EUR 1.2512 / GBP

If you start with $ 1 million, what arbitrage profit in dollars can you make using triangular arbitrage?

2.Given the following information, find the profits you can make using covered interest arbitrage. Assume you can borrow either EUR 100,000 or

JPY 14,619,883.04

EUR interest rate = 3.5% per year

JPY interest rate = 0.4530% per year

S (EUR/JPY) = EUR 0.00684 per JPY

F (EUR/JPY) = EUR 0.0074 per JPY for 1 year maturity forward contract.

a.Which currency would you borrow to conduct covered-interest arbitrage?

b.Assume you want your profits in euro, what covered-interest arbitrage profits do you expect in 1 year? Show all the steps involved in the covered-interest arbitrage process.

c.What would be the profits if you realize them in JPY? Show your calculations.