Holooly Plus Logo
Holooly Plus Logo

Question 7.ST.1: Assume that the following spot exchange rates exist today: £...

Assume that the following spot exchange rates exist today:
£1 = $1.50
C$ = $.75
£1 = C$2
Assume no transaction costs. Based on these exchange rates, can triangular arbitrage be used to earn a profit? Explain.

The blue check mark means that this solution has been answered and checked by an expert. This guarantees that the final answer is accurate.
Learn more on how we answer questions.

No. The cross exchange rate between the pound and the C$ is appropriate, based on the other exchange rates. There is no discrepancy to capitalize on.

Related Answered Questions

Question: 7.ST.5

Assume that the British pound’s one-year forward rate exhibits a discount. Assume that interest rate parity continually exists. Explain how the discount on the British pound’s one-year forward discount would change if British one-year interest rates rose by 3 percentage points while U.S. one-year ...

Verified Answer:

The one-year forward discount on pounds would beco...
Question: 7.ST.4

Explain in general terms how various forms of arbitrage can remove any discrepancies in the pricing of currencies. ...

Verified Answer:

If there is a discrepancy in the pricing of a curr...
Question: 7.ST.3

Using the information in the previous question, does interest rate parity exist? Explain. ...

Verified Answer:

No. The forward rate discount on the pound does no...
Question: 7.ST.2

Assume the following information: Spot rate of £ = $1.60 180-day forward rate of £ = $1.56 180-day British interest rate = 4% 180-day U.S. interest rate = 3% Based on this information, is covered interest arbitrage by U.S. investors feasible (assuming that U.S. investors use their own funds)? ...

Verified Answer:

.No. Covered interest arbitrage involves the excha...