Suppose the exchange rates for the British pound and Swiss franc are: The cross-rate is three francs

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Suppose the exchange rates for the British pound and Swiss franc are:Pounds per $1 = .60 SF per $1 = 2.00

The cross-rate is three francs per pound. Is this consistent? Explain how to go about making some money. The cross-rate should be SF 2.00/£.60 = SF 3.33 per pound. You can buy a pound for SF 3 in one market, and you can sell a pound for SF 3.33 in another. So we want to first get some francs, then use the francs to buy some pounds, and then sell the pounds. Assuming you have $100, you could:

1. Exchange dollars for francs: $100 × 2 = SF 200.

2. Exchange francs for pounds: SF 200/3 = £66.67.

3. Exchange pounds for dollars: £66.67/.60 = $111.11.

This would result in an $11.11 round-trip profit.

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Related Book For  answer-question

Corporate Finance

ISBN: 9781265533199

13th International Edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe

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