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Suppose the Japanese yen exchange rate is ¥116 = $1, and the British pound exchange rate is £1 = $1.27.

a. What is the cross-rate in terms of yen per pound? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b. Suppose the cross-rate is ¥156 = £1. What is the arbitrage profit per dollar used? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

Answer :

Final answer:

The cross-rate in terms of yen per pound is ¥91.34. The arbitrage profit per dollar used is ¥64.57.

Explanation:

To calculate the cross-rate in terms of yen per pound, we divide the yen exchange rate by the pound exchange rate:

Cross-rate (yen per pound) = Yen exchange rate / Pound exchange rate

Given:

  • Yen exchange rate = ¥116 = $1
  • Pound exchange rate = £1 = $1.27

Substituting the values:

Cross-rate (yen per pound) = ¥116 / £1.27

To calculate the arbitrage profit per dollar used, we compare the given cross-rate with the calculated cross-rate:

Arbitrage profit per dollar used = Given cross-rate - Calculated cross-rate

Given:

  • Given cross-rate = ¥156 = £1
  • Calculated cross-rate = ¥116 / £1.27

Substituting the values:

Arbitrage profit per dollar used = ¥156 - (¥116 / £1.27)

Learn more about calculating cross-rate and arbitrage profit in foreign exchange here:

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