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Question: suppose you obtain the following exchange rate quotes in the...

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Suppose you obtain the following exchange rate quotes in the spot market from a bank:

S(¥/£) =139.6733–139.8538

S(¥/€) =124.4535–124.4889

S(€/£) =1.1175–1.1212

(a)Is there any arbitrage opportunity in trading £ and €?If yes, what would you do to capture the arbitrage profit? What is his arbitrage profit (measured in€)? If no, explain why. Explain.15points)

(b)Based on your answer in part (a), discuss the adjustment mechanism (i.e., explain how the transactions you took in part (a) would eliminate the arbitrage profit). (9points)

(c) Find the direct bid price and ask price of £ in terms of € such that triangular arbitrage is not possible. (6 points)

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