Given the following exchange rates, which of the multiple-choice choices represents a potentially profitable intermarket arbitrage opportunity?
¥129.87/$
Euro 1.1226/$
Euro 0.00864/¥

Question

Quizplus · Accepted Answer

To check for arbitrage opportunities, we need to calculate the cross exchange rate between the two currencies.

Cross rate between EUR and JPY = (EUR/USD) ÷ (JPY/USD)

= 1.1226 ÷ 129.87

= 0.00863

The actual exchange rate between EUR and JPY is given as 0.00864, which means that the euro is overvalued relative to the yen.

To exploit this mispricing, we need to buy yen with euros.

Let's say we have €1,000.

Sell €1,000 for USD at a rate of 1.1226.

Buy JPY with the USD at a rate of 129.87.

Finally, buy euros back with the JPY at a rate of 0.00864.

We get back €1,000.30, which represents a profit of €0.30 or JPY 34.46.

The only answer that represents a potentially profitable intermarket arbitrage opportunity is B, which gives a cross rate of ¥114.96/euro, indicating that the euro is undervalued relative to the yen.

Given the Following Exchange Rates, Which of the Multiple-Choice Choices