Triangular Arbitrage the U

question 85

Multiple Choice

Triangular Arbitrage The U.S.dollar spot exchange rate with the Australian dollar is $1 = AU$1.2219.The U.S.dollar and euro exchange rate is $1 = €0.7595.If the cross-rate between the euro and Australian dollar is €1 = AU$1.575 then show that an arbitrage is possible.What positions should be taken to profit from the mispricing?

• A)Starting with U.S.dollars, buy Australian dollars and convert them to euros, then convert back to U.S.dollars.
• B)Starting with U.S.dollars, buy euros and convert them to Australian dollars, then convert back to U.S.dollars.
• C)Starting with euros, buy U.S.dollars and convert them to Australian dollars, then convert back to euros.
• D)Starting with Australian dollars, buy euros and convert them to U.S.dollars, then convert back to Australian dollars.

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