Answers to End of Chapter 7 Questions

48. Profit from Triangular Arbitrage. Alabama Bank is willing to buy or sell British pounds for $1.98.
The bank is willing to buy or sell Mexican pesos at an exchange rate of 10 pesos per dollar. The bank is willing to purchase British pounds at an exchange rate of 1 peso = .05 British pounds. Show how you can make a profit from triangular arbitrage and what your profit would be if you had $100,000.

ANSWER: 1 pound = 20 pesos

$100,000/1.98 = 50,505 pounds
50,505 pounds x 20 = 1,010,100 pesos = $101,010
Profit is $1,010

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