Suppose the Japanese yen exchange rate is ¥77 = $1, and the British pound exchange rate...
|
Suppose the Japanese yen exchange rate is ¥77 = $1, and the British pound exchange rate is £1 = $1.61. |
| a. |
What is the cross-rate in terms of yen per pound? (Round your answer to 2 decimal places, e.g., 32.16.) |
| Cross-rate | ¥/£ |
| b. |
Suppose the cross-rate is ¥126 = £1. What is the arbitrage profit per dollar used? |
Homework Answers
a]
Cross-rate ¥/£ = (¥/$) * ($/£)
Cross-rate ¥/£ = 77 * 1.61 = ¥123.97 / £.
b]
Let us say we start with $1.
This is converted into £. £ received = 1 / 1.61 = £0.6211.
£0.6211 is converted into ¥. ¥ received = 0.6211 * 126 = ¥78.2609.
¥78.2609 is converted back into $. $ received = 78.2609 / 77 = $1.0164.
Arbitrage profit = $1.0164 - $1 = $0.0164.
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