Suppose you find the following exchange rates prevailing in various different currency markets.

• 2 NZ Dollars = 1 British Pound;
• 1 British Pound = 1 US Dollar;
• 1 US Dollar = 1 NZ Dollar.

(a) Are these currency values in equilibrium or is there an arbitrage opportunity here; meaning that starting with NZ $100, can you end up making a profit by buying and selling the different currencies?[3 marks]

(b) What does arbitraging mean? Why do arbitraging activities tend to eventually eliminate such an arbitrage opportunity and drive prices to equilibrium?[4 marks]

(c) Keeping the following two exchange rates as they are.

• 2 NZ Dollars = 1 British Pound;
• 1 British Pound = 1 US Dollar;

Calculate the exchange rate between the US dollar and the NZ dollar such that there is no arbitrage opportunity among the three currencies.[3 marks]