1. Suppose you have $1000 and want to take advantage of arbitrage opportunities that you think exist in the forex market. Suppose that the pound-dollar exchange rate is 0.625, the dollar-yen rate is 0.009, and the pound-yen rate is 0.0075. Explain clearly and with numerical computations how you can make a profit from this through triangular trading. What is your profit in dollars after you are done trading?
2. Consider options on Bigmove Corporation stock. Suppose that there are call options with a strike price of $75 and put options with a strike price of $65. Which, if any, of the options are in the money if the current price of Bigmove’s stock is (a) $60, (b) $70, and (c) $80?