Suppose You Observe the Following Exchange Rates: €1 =

question 14

Multiple Choice

Suppose you observe the following exchange rates: €1 = $.85; £1 = $1.60; and €2.00 = £1.00.Starting with $1,000,000,how can you make money?

• A)Exchange $1m for £625,000 at £1 = $1.60.Buy €1,250,000 at €2 = £1.00; trade for $1,062,500 at €1 = $.85.
• B)Start with dollars,exchange for euros at €1 = $.85; exchange for pounds at €2.00 = £1.00; exchange for dollars at £1 = $1.60.
• C)Start with euros; exchange for pounds; exchange for dollars; exchange for euros.
• D)No arbitrage profit is possible.

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