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You have the following bank quotations. Bank A: Sb(pound/$) = 0.6492, Sa(pound/$) = 0.6493; Bank B: Sb(euro/$) = 0.7640, Sa(euro/$) = 0.7642; Bank C: Sb(pound/euro)

"You have the following bank quotations. Bank A: Sb(pound/$) = 0.6492, Sa(pound/$) = 0.6493; Bank B: Sb(euro/$) = 0.7640, Sa(euro/$) = 0.7642; Bank C: Sb(pound/euro) = 0.8491, Sa(pound/euro) = 0.8493. Which of the following strategies would earn you risk-free profit?"

"Start with dollars, exchange for euros, exchange for pounds, exchange for dollars. "

"Start with pounds, exchange for euros, exchange for dollars, exchange for pounds."

Both a. and b. are profitable strategies because both direct and indirect rates are out of equilibrium.

There is no opportunity to earn arbitrage because all rates are equilibrium rates.

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