Question

QUESTION 14 You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.00 - €1.00 and the dollar-pound exchange rate is quoted at $1.80 - 21.00. If a bank quotes you a cross rate of £1.00 - €1.50, how much money can an astute trader make? No arbitrage is possible. $1,160,000 $200,000 $250,000 Click Save and Submit to save and submit. Click Save All Answers to save all answers. Save All Answers Save and Submit

Answer 1

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The trader starts with $1,000,000. These are converted into € at the dollar-euro exchange rate. € received =  $1,000,000 * 1.00 = €1,000,000

The €1,000,000 are converted into £ at the cross rate quoted by the bank.  £ received = €1,000,000 / 1.50 =  £666,666.67

The £666,666.67 are converted back into $ at the dollar-pound exchange rate. $ received = £666,666.67 * 1.80 = $1,200,000

Profit made by trader = $1,200,000 - $1,000,000 = $200,000