Suppose the Japanese yen exchange rate is ¥78.47 = $1, and the British pound exc

Question

Suppose the Japanese yen exchange rate is ¥78.47 = $1, and the British pound exchange rate is £1 = $1.57. (Enter your answer as directed, but do not round intermediate calculations.) Required: (a) What is the cross-rate in terms of yen per pound? (Do not include the yen sign (¥). Round your answer to 2 decimal places (e.g., 32.16).)

Cross-rate ¥

(b) Suppose the cross-rate is ¥125 = £1. What is the arbitrage profit per dollar? (Round your answer to 4 decimal places (e.g., 32.1616).)

Arbitrage profit per dollar $

Explanation / Answer

Japanese yen exchange rate is ¥78.47 = $1

British pound exchange rate is £1 = $1.57

a.

Cross-rate in terms of yen per pound = 78.47 × 1.57

                                                           = ¥123.1979

Hence, Cross-rate in terms of yen per pound is ¥123.1979 per pound.

b.

If cross-rate is ¥125 = £1

Then arbitrage profit per pound = ¥125 - ¥123.1979

                                                  = ¥1.8021

Arbitrage profit per pound is ¥1.8021.

So, arbitrage profit per dollar = ¥1.8021 / 1.57

                                               = ¥1.1478

Hence, arbitrage profit per dollar is ¥1.1478.

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