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Direct cross rate calculation of the british pound

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Reference no: EM132118663

Smith has U.S. dollars ($) amounting to $1,000,000, and is provided with the following quotes:

Bank C: Euro/US dollar = €0.8529/$

Bank C: British pound /US dollar = £0.7501/$

Bank D: British pound/Euro = £0.8864/€

He did his own direct cross rate calculation of the British pound/Euro and according to him the British pound/Euro = £0.8864/€ quotation from Bank D, provides him with an arbitrage opportunity, since the direct cross rate, based on the quotations of Bank C is £0.8795/€. How can Smith make a profit from this opportunity?

a. He can sell $ for €0.8529 with Bank A, then sell € for £0.8864 with Bank B, then buy $ for £0.7501 with Bank A.

b. He can sell $ for £0.7501 with Bank A, then buy € for £0.8864 with Bank B, then buy $ for €0.8529 with Bank A.

c. He can buy € for $0.8529 with Bank A, then buy £ for €0.8864 with Bank B, then sell £ for $0.7501 with Bank A.

d. He can buy £ for $0.7501 with Bank A, then sell £ for €0.8864 with Bank B, then sell € for $0.8529 with Bank A.

Reference no: EM132118663

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