Suppose in Zurich £/$ = 0

question 14

Essay

Suppose in Zurich £/$ = 0.5,while in New York SF/$ = 2.5,but in London £/SF = 0.1.
(a) Is there any arbitrage profit that could be made with a triangular arbitrage action? Describe an example of how such a profit may be earned.
(b) What would you guess about the relationship between the dollar rates and cross-rates after arbitrageurs notice this profit opportunity?

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Definitions:

Pressure Differences

Pressure differences refer to the variation in pressure between two points, which can cause fluids or gases to flow from areas of higher pressure to areas of lower pressure.

Resistance

The opposition to flow or movement, often encountered in physics, physiology, and various types of materials.

Thoroughfare Channels

Specialized vascular passages in the microcirculation, enabling blood flow from arterioles to venules and bypassing capillary beds.

Fenestrae

Small openings or pores in the endothelial cells of capillaries that allow for the exchange of substances between blood vessels and tissues.