Question
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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