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Assume a USD is worth CAD 0.97, (St=0.97 CAD/USD). Also, a GBP is worth USD 2.05 (St=2.05 USD/GBP). What is the cross rate CAD/GBP? Suppose

Assume a USD is worth CAD 0.97, (St=0.97 CAD/USD). Also, a GBP is worth USD 2.05 (St=2.05 USD/GBP).

  1. What is the cross rate CAD/GBP?
  2. Suppose Kwiki Bank quotes St= 2.15 CAD/GBP. Is arbitrage possible? (Why?)
  3. If yes, describe a triangular arbitrage strategy and determine an arbitrageur's profits. [Assume you borrowed USD 1000]

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