Question: Problem 2 (5 Marks) You see the following spot exchange rates on your computer screen: USD EUR GBP CAD USD 0.8893 0.7893 1.3443 EUR 1.1245

Problem 2 (5 Marks) You see the following spot exchange rates

on your computer screen: USD EUR GBP CAD USD 0.8893 0.7893 1.3443

Problem 2 (5 Marks) You see the following spot exchange rates on your computer screen: USD EUR GBP CAD USD 0.8893 0.7893 1.3443 EUR 1.1245 0.8876 1.5114 GBP 1.2669 1.1266 1.7021 CAD 0.7439 0.6616 0.5873 a. Calculate whether the GBP/CAD exchange rate is in equilibrium? Show your work. (2 marks) b. If the one year expected inflation rate is 2.5% in Canada and 2.9% in Great Britain, which country's currency would you expect to strengthen? No calculations are necessary, just briefly explain why. (2 marks) Assume the actual exchange rate between the GBP and EUR was 0.8660. Calculate how much of an arbitrage profit you can make in USD if you started with USD 100,000. (1 marks)

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