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Compute the profit that you would earn

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Question - You go to a bank and are given these quotes: You can buy a euro for 14 pesos.

The bank will pay you 13 pesos for a euro.

You can buy a U.S. dollar for 0.85 euros.

The bank will pay you 0.75 euros for a U.S. dollar.

You can buy a U.S. dollar for 9 pesos.

The bank will pay you 8 pesos for a U.S. dollar.

You have $1,000. Can you use triangular arbitrage to generate a profit? If so, explain the order of the transactions that you would execute. If you cannot earn a profit from triangular arbitrage, explain why.

1. Yes, you can generate a profit by converting dollars to euros, and then euros to pesos, and then pesos to dollars.

2. Yes, you can generate a profit by converting dollars to pesos, and then pesos to euros, and then euros to dollars.

3. No, triangular arbitrage is not possible because the quoted cross exchange rates do not differ from the rates that should exist.

Compute the profit that you would earn using triangular arbitrage. Enter "0", if you incur a loss. Do not round intermediate calculations. Round your answer to the nearest cent.

Reference no: EM133036867

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