Suppose you have the following spot exchange rates in FX markets:

£1 = $1.35, $1 = Yen 114, and £1 = Yen 157.

1. Please check if the cross rate between the Japanese yen (¥) and the UK pound (£) is consistent or not. (1 pt)

2. How much profit (in $ terms) can you make from trading $1,000? Describe your trading process to get your profit, if there is any. (1 pt)

3. How much will you have profit or loss when you follow a reversed order of transaction between UK pound and euro from that in Q1. b) above? Describe your trading process. (1 pt)

4. How do you expect the current cross rate of £1 = ¥157 change after numerous arbitrage transactions in global FX markets take place– go up or down in the value of UK pound with respect to the Japanese yen? Explain why and how.

Answer rating: 100% (QA)

SOLUTION a To check if the cross rate between the Japanese yen and the UK pound is consistent we can use the given exchange rates to calculate the cro... View the full answer