Suppose you have the following spot exchange rates in FX markets:

1 = $1.29, 1 = $1.17, and 1 = 1.13.

i) Please check if the cross rate between the euro () and the UK pound () is consistent or not.

2. How much profit (in $ terms) can you make from trading $1,000? Describe your trading process to get your profit, if there is any.

3. How much will you have profit or loss when you follow a reversed order of transaction between UK pound and euro from that in Q2. ii) above?

iv) How do you expect the current cross rate of 1 = 1.13 change after numerous arbitrage transactions in global FX markets take place go up or down in the value of UK pound with respect to euro? Explain why and how.

3. You purchased a European foreign exchange option contract to buy 5000 UK pound at the price of $1.30/ which expires today. You have paid $140 for the contract. Suppose the spot rate on the expiration date, today, is $1.32/, what will be your optimal decision for the contract (exercise or not exercise)? Discuss why or why not.