Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
What L/$ rate would stop arbitrage possibilities
Transcribed Image Text:Currency Quotes Curtency Read it left over top. Example 11.9 K/L
England(L)
$
Norway(K)
11.90
9.35
England(L)
0.79
Expert Solution
Step 1
Cross rate between two currency is the rate which is determined by taking the reference of the third currency. Here, cross rate between L and $ is calculated using K (Norway Currency) . At this rate, there will be no arbitrage possibilities, however if the rate is higher or lower than this rate, then triangular arbitrage possibility exists.
So here, cross rate between L and $ using the reference of Norway (K) is as follows:
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