Assume the euro is priced at $1.8510 in New York and the pound is priced at $1.2

Question

Assume the euro is priced at $1.8510 in New York and the pound is priced at $1.223 in London. At the same time, Frankturt banks are offering the euro at 1.5100. Based on your calculation of a cross rate between you discovered there is a triangular arbitrage opportunity Use this information to answer this and the next 2 questions. Which currency is underpriced? .and euro ( and comparing it with the market cross rate, Select one: a. Euro b. Pound sterling c. None of the choices is correct d. US dollar e. Insufficient information to decide Your arbitrage transaction will be to Select one: a.buy pound sterling, sell the US dollar b. buy euro, sell the US dollar G.buy US dollar, sell euro d. buy the pound sterling, sell the euro e. buy euro, sell pound sterling

Explanation / Answer

1) USD/Euro 1.851 USD/Pound 1.2223 Pound/Euro 1.8510/1.2223 1.514358 Frankfurt banks are offering the euro at 1.5100 pound, the Euro is undervalued 2) Arbitrage option would be to buy USD and Sell Euro

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