3 10. We have the following exchange rates. $1.58/£1, $1.30/€1, and €1.40/E1. What will be theprofit from arbitrage?a. 0.24 for every dollar.b. 0.24 for every pound.0.24 for every euro.d. Arbitrage will not occur because the prices are in equilibrium.e. Triangular arbitrage cannot occur.f. None of the above.C.

From third relation, 1 Pound = 1.40 Euro

10. We have the following exchange rates. $1.58/E1, $1.30/€1, and €1.40/E1. What will be the profit from arbitrage? a. 0.24 for every dollar. b. 0.24 for every pound. C 0.24 for every euro. d. Arbitrage will not occur because the prices are in equilibrium. e. Triangular arbitrage cannot occur. f. None of the above.

10. We have the following exchange rates. $1.58/E1, $1.30/€1, and €1.40/E1. What will be the profit from arbitrage? a. 0.24 for every dollar. b. 0.24 for every pound. C 0.24 for every euro. d. Arbitrage will not occur because the prices are in equilibrium. e. Triangular arbitrage cannot occur. f. None of the above.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter27: Multinational Financial Management

Section: Chapter Questions

Problem 6P

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Suppose the real exchange rate is constant – say, at the level required for net exports (or the current account) to equal zero. In this case, if foreign inflation is higher than domestic inflation, what must happen to the nominal exchange rate over time?
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Let's say a bank offers the following exchange rates between US Dollar ($), Euro (€), British Pound (£) and Japanese Yen (¥): $/€ 1.20 i.e., €1 equals $1.20 $/£1.40 i.e., £1 equals $1.40 €/£1,16 i.e., £1 equals €1.16 ¥/$120 i.e., $1 equals 120¥ ¥/€140 i.e., €1 equals 140¥ Show how you can make a profit with triangular arbitrage by trading at the above exchange rates by following two alternative strategies. More specifically, the first strategy should only use transactions/conversions between dollar ($), Euro (€) and poundsterling (£), while the second strategy should only use transactions/conversions between dollar ($), Euro (€) and Japanese yen (¥). In both strategies, suppose you start with $1 ($) in your hands. Calculate the profit of each strategy. Which of the two strategies is more advantageous?
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