Assume a bank in Spain quotes theEUR:USD Ask rate at 1,1000.Assume further that the rates below represent the Ask rate for the USD: ZAR and the Bid rate for the EUR: ZAR as quoted by a South African Bank.

USD: ZAR = 17.000 (Ask Rate)

EUR: ZAR = 19.000 (Bid Rate)

a)Compare the implied EUR:USD bid rate to the quoted EUR:USD ask rate of the Spanish

Bank to prove that an arbitrage opportunity exists. Explain why this opportunity exists.

(3 Marks)

b)Assume you have ZAR5 million to spend, calculate the arbitrage profit you could make by exploiting the arbitrage opportunity

(5 Marks)