Assume the U

question 87

Multiple Choice

Assume the U.S. dollar spot exchange rate with the Canadian dollar is $1 = CA$1.125. The U.S. dollar and Swiss Franc exchange rate is $1 = 1.235. If the cross rate between the franc and Canadian dollar is 1 franc = CA$0.9820, then show that an arbitrage is possible. What positions should be taken to profit from the mispricing?

• A) Start with U.S. dollars, buy francs and convert them to Canadian dollars, then convert back to U.S. dollars.
• B) Start with francs, buy U.S. dollars and convert them to Canadian dollars, then convert back to francs.
• C) Start with Canadian dollars, buy francs and convert to U.S. dollars, then convert back to Canadian dollars.
• D) Start with U.S. dollars, buy Canadian dollars and convert to francs, then convert back to U.S. dollars.