1.

The bid-ask quotes for the USD,GBP, and EUR are:

EUR/USD: 0.7000 – 0.7010
USD/GBP: 1.7000 – 1.7010
EUR/GBP: 1.2000 – 1.2010
Calculate The potential arbitrage profit from a triangular arbitrage based on an
initial position of 1 million USD.

2. The current spot exchange rate: $1 = €0.74.

Europe US
Nominal 1 year 4% ?
Interest
Expected inflation 2% 1%

a) According to the International Fisher relation, calculate the 1 year nominal

interest rate in the US
b) If PPP holds, calculate the expected exchange rate in one year
c) Assume that the US interest rate is 3.5%. Calculate the 1 year forward rate.

3. The Singapore dollar—U.S. dollar (S$/$) spot exchange rate is S$1.60/$, the
Canadian dollar—U.S. dollar (CD/$) spot rate is CD1.33/$ and the S$/CD1.15.
Determine the triangular arbitrage profit that is possible if you have $1,000,000. 

4. You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro

exchange rate is quoted as $1.50 = €1.00 and the dollar-pound exchange rate is
quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.25 how can
you make money? 

5. Suppose the Canadian dollar is currently traded at C$ 1.40/$. The Deutsche mark
is traded at DM 1.39/$. Ignoring transaction costs:

a. Determine the C$/DM exchange rate consistent with

these direct quotations.
b. Suppose the C$/DM cross rate in the market was at C$ 1.05/DM. Is there any
arbitrage opportunity?
c. How would you take advantage of any arbitrage situation?
d. What is your profit?