Examine the cross-spot rates shown in Exhibit 2. Are there any triangular arbitrage opportunities among these currencies (assume deviations from theoretical cross rates of 5 points or less are attributable to transaction costs)? How much profit could be made on a $5 million transaction?

Hints: Find the arbitrage first in Exhibit 2(show work). Then use Exhibit 1 to start with dollars, convert them, and perform the arbitrage.

Exhibit 1 Spot and Forward Exchange Rates 1 Month 12 Months Currency Sterlinga Spot 1.4890/00 3 Months 160/156 6 Months 302/289 55/52 560/523 Deutsche mark 2.0310/20 22/18 64/54 128/105 277/228 French Franc 6.6575/625 73/86 263/296 505/590 1194/1351 Yen 154.20/30 8/6 33/27 75/62 164/137 SDR 1.2141/43 5/3 12/8 18/11 24/12 au.S. dollars per unit of currency. Exhibit 2 Cross-Spot Exchange Ratesa DM FF Yen DM 3050/51 1.3169/71 FF 3.2779/88 4.3365/84 Yen 75.9232/350 23.1595/618 aQuotes should be interpreted as units of the currency represented in the left-hand column per unit of currency shown in the top row. Quotes for the DMlyen and FFlyen are expressed in units per 100 yen. Exhibit 1 Spot and Forward Exchange Rates 1 Month 12 Months Currency Sterlinga Spot 1.4890/00 3 Months 160/156 6 Months 302/289 55/52 560/523 Deutsche mark 2.0310/20 22/18 64/54 128/105 277/228 French Franc 6.6575/625 73/86 263/296 505/590 1194/1351 Yen 154.20/30 8/6 33/27 75/62 164/137 SDR 1.2141/43 5/3 12/8 18/11 24/12 au.S. dollars per unit of currency. Exhibit 2 Cross-Spot Exchange Ratesa DM FF Yen DM 3050/51 1.3169/71 FF 3.2779/88 4.3365/84 Yen 75.9232/350 23.1595/618 aQuotes should be interpreted as units of the currency represented in the left-hand column per unit of currency shown in the top row. Quotes for the DMlyen and FFlyen are expressed in units per 100 yen