Question

Suppose the Japanese yen exchange rate is ¥78.47 = $1, and the British pound exchange rate is £1 = $1.57.

a. What is the cross-rate in terms of yen per pound? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Do not include the yen sign (¥).)

Cross-rate            ¥

b. Suppose the cross-rate is ¥125 = £1. What is the arbitrage profit per dollar? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

Arbitrage profit per dollar            $

Answer 1

Cross rate yen per pound = (yen/Dollar)*(Dollar/Pound)

= (78.47)*1.57

= Yen123.1979 per pound

b.Actual cross rate = Yen 125/Pound

convert dollar and pound and get 1/1.57 pounds

then, pound into yen (1/1.57)*125

And yen into dollar = (1/1.57)*125*(1/78.47)

= $1.014627

Hence, arbitrage profit per dollar = $0.014627