A Foreign currency trader at the banks FX desk calls to inform you that Bank of America is quoting $1.12/1, and Citibank is offering $1.28/1. The trader also noticed that Credit Agricole is making market in pound sterling and Euro at 1.18/1.

a. What is the implied / cross-rate for the two European currencies? Show this trader how you would use $1 million to conduct a triangular arbitrage to profit from the deviation (if any) of the implied cross rate of the /, from the rate quoted by Credit Agricole.

b. Suppose you observed that the 3-month forward rate quote from Bank of America is $1.21/1, calculate the forward premium (discount) implied by the quote.

c. What do investors expect to happen to the value dollar in the next three months?