Suppose the Japanese yen exchange rate is 114 = $1, and the British pound exchange rate is 1 = $1.26. a. What is the cross-rate in terms of yen per pound? b. Suppose the cross-rate is 147 = 1. Is there an arbitrage opportunity here? If there is, explain how to take advantage of the mispricing and the potential arbitrage
Chapter 21, Questions and Problems #5
Suppose the Japanese yen exchange rate is ¥114 = $1, and the British pound exchange rate is £1 = $1.26.
a. What is the cross-rate in terms of yen per pound?
b. Suppose the cross-rate is ¥147 = £1. Is there an arbitrage opportunity here? If there is, explain how to take advantage of the mispricing and the potential arbitrage profit. What is your arbitrage profit per dollar used?
Exchange RateThe value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...
This problem has been solved!
Do you need an answer to a question different from the above? Ask your question!
Answer
a. The cross rate in / terms is: (114/$1)($1.26/1) = 143.64/1 b. The yen is quoted too …View the full answer
Related Book For 
Fundamentals of Corporate Finance
12th edition
Authors: Stephen M. Ross, Randolph W Westerfield, Robert R. Dockson, Bradford D Jordan
ISBN: 978-1260153590