To determine: The implicit rate of exchange between the euros and yen when both the currencies are quoted in Country U’s currency.
Introduction:
The price of a country’s currency that in term of the other nation’s currency is the exchange rate. The rate of exchange can be either floating or fixed. The two components of the exchange rates are the foreign currency and the domestic currency.
Explanation of Solution
The cross rate is the implicit rate of exchange between two currencies (mainly, they are not Country U) that are quoted in some other third currency (generally, the US$). The triangle arbitrage can also be referred to as the cross currency arbitrage. The triangle arbitrage is an act of misusing an arbitrage opportunity that results from a pricing difference among the three different currencies in a foreign exchange market.
The direct and indirect quotes are not quoted for many currencies and most of the countries sell and purchase the required currency for an exchange rate. Thus the implicit rate of exchange between the euros and yen when both the currencies are quoted in Country U’s currency is known as the cross rates or triangle arbitrage.
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