An investment banker has $10,000,000 to invest in the foreign exchange market. The dollar-euro exchange rate is

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Question:

An investment banker has $10,000,000 to invest in the foreign exchange market. The dollar-euro exchange rate is quoted at $1.50/€ and the dollar-pound exchange rate is quoted at $1.60/£. If a bank quotes a cross rate of €1.10/£, how much money can it make (in dollar terms) through triangular arbitrage if it is charged an interest rate of 2% on the funds lent? Round intermediate steps to four decimal places.

1. Based on the information provided in the previous question, which of the following will occur to eliminate the arbitrage opportunity?

to. The euro will appreciate against the dollar.

b. The pound will depreciate against the dollar.

C. The pound will depreciate against the euro.

d. None of the above

2. A money manager with $1,000,000 to invest notices that the dollar/yen exchange rate is quoted at ¥125/$ and the dollar/franc exchange rate is quoted at CHF.80/$. If a bank quotes you a cross rate of ¥156.25/CHF, how much money can you make through triangular arbitrage (in dollar terms)? Round your intermediate steps to four decimal places and your final answer to two decimal places. Do not use currency symbols or words when entering your answer.

3. How will currency prices be adjusted to remove the arbitrage opportunity from the question above?

to. The yen will appreciate against the dollar.

b. The franc will depreciate against the dollar.

C. The franc will appreciate against the yen.

d. No adjustment is necessary as arbitrage was not possible.

4. Use the following to answer the next two questions.

You have observed the following spot prices of dollars and euros.

Banco X: $1.1033-37

Bank Y: $1.1032-38

Banco Z: $1.1029-32

Find the maximum arbitrage profit available (in dollar terms) if you have $6 million at your disposal. Round your intermediate steps to four decimal places and your final answer to two decimal places.