An investment banker has $10,000,000 to invest in the foreign currency market. T

Question

An investment banker has $10,000,000 to invest in the foreign currency market. The dollar-euro exchange rate is quoted as $1.50/ € and the dollar-pound exchange rate is quoted at $1.60/£. If a bank quotes a cross rate of €1.10/£, how much money can she make (in terms of dollars) via triangular arbitrage if she is charged a 2% interest rate on borrowed funds? Round intermediate steps to four decimals.

312,500

112,500

0

1,420,833.33   

Based on the information provided in the previous question, which of the following will occur to eliminate the arbitrage opportunity?

The euro will appreciate against the dollar.

The pound will depreciate against the dollar.

The pound will depreciate against the euro.

None of the above

312,500

112,500

0

1,420,833.33   

Based on the information provided in the previous question, which of the following will occur to eliminate the arbitrage opportunity?

The euro will appreciate against the dollar.

The pound will depreciate against the dollar.

The pound will depreciate against the euro.

None of the above

QUESTION S 25 ponts See An rwestmant banker has $10,000,000 to invest in the foreign currency market. The dola-ouro axchange rate is qutled as $1.50 and the dolar-pound exchange rale is quosed at $1 0/E If a bank quotes a cross ralo of 1.10E, how mach money can she make lin terms of dollars) via tringular artrage il she is charged a 2% nterest rate on borrowed lids? Round intermediate steps to four decimals O 312.500 O 112.500 o 0 O 1420 833.33 6 23 poims Sae QUESTIONS Based on the information provided in the pravious question, which of the lelowing wil ocour to elminale the opportunity? O The euro will appreciale aganst the doilar O The pound wil doprecistle against the doliar ? The pound wil depreciate against tha duro O None of the above

Explanation / Answer

First convert $ into pounds

1 pound = 1.6$

? =10,000,000$

=10,000,000/1.6

=6250,000 pounds

Now convert pounds into euro

1 pound = 1.1 euro

=6250,000 pound = ?

=6250,000*1.1

=6875,000 euro

now convert euro into $

1 euro = 1.5$

=6875000*1.5

=10312500$

Thus profit = 10312500-(10,000,000*102%)

=10312500-10,200,000

=112500$

The pound will depreciate against the dollar. If this happens then one will be able to realise less unit of dollar against one unit of pound and thus will eliminate arbitrage opportunity

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