A cross exchange rate is mostly used when the currency pair being traded does not involve the US dollar. Imagine you are traveling (could be for business or vacation). Your first stop is in the Czech Republic; its currency is the koruna (symbol = K); the current exchange rate is K22.58/$. From the Czech Republic, you fly to Croatia; its currency is the kuna (symbol = kn); the current exchange rate is kn6.4976/$. When you land in Croatia you realize that you have K1000 in your pocket from the Czech Republic.

1. What is the koruna/kuna cross rate? Show how you calculated this.
2. How many kuna will you get for your koruna? Show how you calculated this.
3. Say you found a currency exchange that would give you 4 koruna for 1 kuna: K4/kn. Explain whether and how you could make money using triangular arbitrage. To keep us all on the same page, conduct your analysis assuming you have $100 to invest. Also note, that you should start and end in dollars, since we are in the US. However, the arbitrage opportunity could change with the direction you take for the second and third countries (so try it going from $ to K to kn to $, and also from $ to kn to K to $).