A money manager with $1,000,000 to invest notices that the dollar/yen exchange r
ID: 2615522 • Letter: A
Question
A money manager with $1,000,000 to invest notices that the dollar/yen exchange rate is quoted as ¥125/$ and the dollar/franc exchange rate is quoted at CHF.80/$. If a bank quotes you a cross rate of ¥156.25/CHF how much money can you make via triangular arbitrage (in terms of dollars)? Round intermediate steps to four decimals and your final answer to two decimals. Do not use currency symbols or words when entering your response.
How will currency prices adjust to eliminate the arbitrage opportunity in the previous question?
The yen will appreciate against the dollar.
The franc will depreciate against the dollar.
The franc will appreciate against the yen.
No adjustment is necessary since arbitrage was not possible.
The yen will appreciate against the dollar.
The franc will depreciate against the dollar.
The franc will appreciate against the yen.
No adjustment is necessary since arbitrage was not possible.
e oound wll depreciate against the euro. O None af the above QUESTION 7 6.25 points A money manager with $1,000.000 to invest nolices that the doilariyan exchange rate is quoted as 1255 and the dolar'tranc exchange rate is quoted at CHF 0S. If a bank quobos you a cross rate of *156.25/CHF how much monay can you make via triangular arbitrage in tarms of dollars)? Round intermedate stops to four decimals and your fnal answer to two decimals. Do nat use curency symbols or wards when entering your response. QUESTION 8 6.23 points How will curreney prices adjust to alirrinate the arotrage opportunity in the previous quastion? 0 The yen wil appreciate against the dolar. O The franc well epreciate againet tra dols O The frane wll appreciate against the yan O No adustment is necessary since aitrage was nat possiblaExplanation / Answer
Investment Available = $ 1 million, Dollar-Yen Exchange Rate = Y 125/$, Dollar-Franc Exchange Rate = CHF 0.8/$ and Y 156.25/CHF
In order to execute triangular arbitrage one needs to undertake the following steps:
Convert $1 million into Yen to yield Y 125 million
Convert Y 125 million into CHF to yield = 125 / 156.25 = 0.8 million CHF
Convert 0.8 million CHF to $ to yield = 0.8 / 0.8 = $ 1 million
These set of steps indicate that there are no opportunities of a triangular arbitrage as no profit can be made.
Arbitrage Profit = $ 0
Hence, the correct option is (D).