As a trader in New York's financial district, you are interested in three currencies: US Dollars ($), Bezos Bucks (B), and Musk Melons (u). You have access to the following spot exchange rates. $0.50/ B $1.25/ u B 3/ u a) Does arbitrage exist? Compare the cross rate of Musk Melons to Bezos Bucks to their "actual" exchange rate in US Dollars to justify your answer. (Hint: Compare the given B/u rate to the B/u rate you would obtain using each currency's rate compared to S). b) Show how triangular arbitrage can be used to earn a profit. Assume that you are given $50 million to start with. c) Will you be able to make a profit from this exchange rate forever? Why or why not? (Explain the effect of this arbitrage on the foreign exchange market)

As a trader in New York's financial district, you are interested in three currencies: US Dollars ($), Bezos Bucks (B), and Musk Melons (u). You have access to the following spot exchange rates. $0.50/ B $1.25/ u B 3/ u a) Does arbitrage exist? Compare the cross rate of Musk Melons to Bezos Bucks to their "actual" exchange rate in US Dollars to justify your answer. (Hint: Compare the given B/u rate to the B/u rate you would obtain using each currency's rate compared to S). b) Show how triangular arbitrage can be used to earn a profit. Assume that you are given $50 million to start with. c) Will you be able to make a profit from this exchange rate forever? Why or why not? (Explain the effect of this arbitrage on the foreign exchange market)

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

ChapterP2: Part 2: Exchange Rate Behavior

Section: Chapter Questions

Problem 1Q

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A currency trader observes that in the spot exchange market, 1 U.S.dollar can be exchanged for 3.58 Israeli shekels or for 109 Japanese yen. What is the cross-exchange rate between the yen and the shekel; that is, how many yen would youreceive for every shekel exchanged?
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Select all statements below that correctly describe currency spot markets: The most heavily traded currency in spot markets is the United States dollar. The spot market includes currency futures, forwards, and options. The spot market is for immediate exchange of currencies, but the value/settlement date may take up to two days. The spot market has the same trading hours as the London Stock Exchange. The spot market is centralized in New York city. The retail spot market includes large corporations, local banks, and individuals.
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A currency trader observes that in the spot exchange market, 1 U.S. dollar can be exchanged for 3.5 Israeli shekels or for 112 Japanese yen. What is the cross-exchange rate between the yen and the shekel; that is, how many yen would you receive for every shekel exchanged? Do not round intermediate calculations. Round your answer to the nearest sen. Note: A sen is 1/100th of a yen.
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