Assume the euro is priced at $1.8510 in New York and the pound 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 this and the next 3 questions.
1) Which currency is underpriced?
a. Pound sterling
b. Insufficient information to decide
c. None of the choices is correct
d. US dollar
e. Euro
2) Your arbitrage transaction will be to
a. buy euro, sell the US dollar
b. buy US dollar, sell euro
c. buy the pound sterling, sell the euro
d. buy pound sterling, sell the US dollar e. buy euro, sell pound sterling
3) Now with € 1,000,000 arbitrage capital, how much will be the total proceeds after carrying out the entire round of triangular arbitrage transactions (Round all your calculations to 2 decimal places)?
a. € 1,846,700.00
b. € 1,002,886.21
c. € 1,851,000.00
d. € 1,002,538.29
e. € 997,122.10