You are a U.S.-based treasurer with $1,000,000 to invest.The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00.If a bank quotes you a cross rate of £1.00 = €1.20 how can you make money?

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With $1,000,000, we can buy €625,000 at a rate of $1.60/€. We can then use this €625,000 to buy £520,833.33 at a rate of €1.20/£. Finally, we can sell these £520,833.33 at a rate of $2/£ to get $1,041,666.67, making a profit of $41,666.67. This is possible due to the cross rate of £1.00 = €1.20 provided by the bank, which is lower than its implied rate of £1.00 = €1.33 ($1.60/$2.00). This creates an arbitrage opportunity.

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