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Suppose that an arbitrageur in a domestic country faces an indirect exchange rate mid-point of 1.30 FC units to 1 DC unit. The domestic and
Suppose that an arbitrageur in a domestic country faces an indirect exchange rate mid-point of 1.30 FC units to 1 DC unit. The domestic and foreign currency transaction costs are 0.02% of the direct quote midpoint in each country. In the foreign country, the direct bid-offer spread is (1.2970 bid, 1.3003 offer). What is the widest interval within which the midpoint of the direct bid- offer spread in the domestic country must remain to allow no arbitrage between the currencies of the two countries?
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