Assume the Euro is priced at $1.8510 in NY and the pound is is priced at $1.2223 in London. At the same time, Frankfurt banks are offering the euro at 1.5100 £. Based on your calculation of a cross rate between the US dollar and Euro and comparing it with the market cross rate, you discovered there is a triangular arbitrage opportunity.
Use this information to answer the next 2 questions
a)Which currency is underpriced?
insufficient info
U.S dollar
Pound Sterling
Euro
None of the choices
b) Your arbitrage transaction will be to
a) buy US dollar, sell euro
b) buy pound sterling, sell dollar
c) buy euro, sell dollar
d) buy euro, sell pound
e) buy pound, sell euro
c) Now with Euro 1,000,000 arbitrage capital, how much will the total proceeds after carrying out the entire round of triangular arbitrage transaction?
a) 1,002,538.29
b) 1,002,886.21
c) 997,122.10
d) 1,851,000.00
e) 1,846,700.00