Damelin Bernard is a foreign currency dealer who is provided with the following information:

Euro/U.S. dollar = 0.8518/$

British pound /U.S. dollar = 0.7548/$

British pound/Euro = 0.8863/

2.1. Ignoring transaction costs, is there any arbitrage opportunity based on these quotes? (4 marks)

Show your answer by first calculating the correct direct cross rate that should apply to British pound/Euro cross rate and specify which currency is overvalued and which currency is undervalued in the cross rate calculation provided to Damelin.

2.2. What is the arbitrage opportunity?