Citibank quotes U.S. dollar per pound $1.5000/ National Westminster quotes euros per pound 2.0000/ Deutschebank quotes U.S.
Question:
Citibank quotes U.S. dollar per pound $1.5000/
National Westminster quotes euros per pound 2.0000/
Deutschebank quotes U.S. dollar per euro $0.7550/
a. Calculate implied/theoretical cross rate between euro and pound.
b. Using your answer from part (a), show how you, as currency trader at Citibank with 1,000,000 can make an intermarket arbitrage profit in detail. Show the profit in Euro.
c. Suppose now that National Westminster quotes euros per pound at 1.9800/. Using your answer in part (a), show how you, as currency trader at Citibank with 1,000,000 can make an intermarket arbitrage profit in detail. Show the profit in Euro.
d. Based on your answer from part (b), explain how arbitrage profit can disappear when currency traders like you seek to exploit arbitrage profits.