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Part 3. (Cross rate) Suppose the Canadian dollar is currently traded at 1.40 C$/$. The Swiss Franc is traded at 1.39 SF/$. Ignore transaction costs.

Part 3. (Cross rate) Suppose the Canadian dollar is currently traded at 1.40 C$/$. The Swiss Franc is traded at 1.39 SF/$. Ignore transaction costs.

Determine the C$/SF cross rate using the two rates above.

Suppose the C$/SF exchange rate in the market was at 1.05 C$/SF (note that this is a hypothetical number to give positive arbitrage gains). Explain how you can make arbitrage gains and how much your arbitrage gains are (in percentage terms)?

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