Problem
Assuming the following quotes, calculate how a market trader at Citibank with $1,000,000 can make an intermarket arbitrage profit.:
Citibank quotes U.S. dollar per pound: $1.5900/£
National Westminster quotes euros per pound: €1.2000/£
Deutschebank quotes U.S. dollar per euro: $0.7550/€
Theresa Nunn is planning a 30-day vacation on Pulau Penang, Malaysia, one year from now. The present charge for a luxury suite plus meals in Malaysian ringgit (RM) is RM1,045/day. The Malaysian ringgit presently trades at RM3.1350/$. She determines that the dollar cost today for a 30-day stay would be $10,000. The hotel informed her that any increase in its room charges will be limited to any increase in the Malaysian cost of living. Malaysian inflation is expected to be 2.75% per annum, while U.S. inflation is expected to be only 1.25%.
1) How many dollars might Theresa expect to need one year hence to pay for her 30-day vacation?
2) By what percent has the dollar cost gone up? Why?