QUESTION 1 Use the tolowing information to answer the next two questions The pes

Question

QUESTION 1 Use the tolowing information to answer the next two questions The pesolpound exchange rate is Mex$ 16E whte the euroipound exchange rate s 1.15/E You aso otsorve that the achiesl pesoleuro cross echang rate is Mex$ 12E Find the trianqular artitrage proft (in pounds) avalable to someone hel hsas access to 13,000 000 Round itormedate sps to lou decmals and your final answor to two decenals Do not use the doilar sign when entoning your arwr QUESTION 2 Which of the followng woukd occur to eliminato the artatrage opportunty? O No changes are nacessary ?Thil pourd will appreciate aginst the euro O The pound wil eppreciste aganst the peso O None of the ahove Chok Save and Submit to saee and submit. ChekSave Al Anauers to sove all mvers

Explanation / Answer

1) Their are two route possible :

i) You could go from pound to euro, then euro to peso and then finally peso to pound; or

ii) You could go from pound to peso, then peso to euro and then finally euro to pound.

We go both ways to see which way we can get an arbitrage

Mex$16 / Pound ; Euro 1.15 / Pound ; Mex$12 / Euro

i) Converting 3,000,000 Pounds to euro, we get = Pound 3,000,000 x Euro 1.15 / Pound = Euro 3,450,000

Now, we convert these Euros to Peso, we get = Euro 3,450,000 x Mex$12 / Euro = Mex$ 41,400,000

Finally, we convert Peso to Pound and get = Mex$ 41,400,000 / Mex$ 16 / Pound = Pound 2,587,500

This way we have a loss of (-)412,500 Pounds. So, we have to try the other way.

ii) Converting Pounds to Peso, we get = Pounds 3,000,000 x Mex$ 16 / Pound = Mex$ 48,000,000

Now, we convert Peso to Euro, we get = Mex$ 48,000,000 / Mex$ 12 / Euro = Euro 4,000,000

Finally, converting Euro to Pound, we get = Euro 4,000,000 / Euro 1.15 / Pound = Pound 3,478,260.87

Arbitrage profit = 3,478,260.87 - 3,000,000 = 478,260.87

2) To curb this profit, the pound will appreciate against the Euro, so you get less pounds per euro until their is no profit.

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