Question: 3. Triangle arbitrage (10 points). A foreign currency trader, authorized to trade $1,000,000, faces the following quotes: New York: $1.5900/ London: 1.2000/ Frankfort: $0.7550/ a)

3. Triangle arbitrage (10 points).

A foreign currency trader, authorized to trade $1,000,000, faces the following quotes:

New York: $1.5900/

London: 1.2000/

Frankfort: $0.7550/

a) Check if an arbitrage opportunity exists.

b) Describe the arbitrage strategy and calculate the traders profit. (Be specific. Show all calculations and currency units).

c) Describe the impact of the arbitrage trading on exchange rates in all three cities. (Be specific. State which currency appreciates/depreciates against which currency).

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