You are a U.S.-based treasurer with $1,000,000 to invest.The dollar-euro exchange rate is quoted as $1.50 = €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 = €1.25 how can you make money?

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By buying euros at $1.50 per euro, then buying pounds with those euros at the rate of €1.25 per pound, and finally selling those pounds at $2.00 per pound, you can make a profit due to the discrepancy in the exchange rates.

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