Assume the Pound sterling is worth 9.80 Danish Kroner in Denmark and 5.40 Swiss francs in Zurich.
a. Show how British arbitrageurs can make profits, given that the Swiss franc is worth two Danish Kroner. What would be the profit per pound transacted?
b. What would be the eventual outcome on exchange rates in Denmark and Zurich given these arbitrage activities?
c. Rework step (a) assuming that transaction costs amount to 0.06 percent of the amount transacted. What would be the profit per Pound transacted?
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