Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP5. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the U.S. dollar should ____, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should ____.

Question

Quizplus · Accepted Answer

Triangular arbitrage involves buying and selling currencies in a loop to profit from exchange rate differences. In this case, we can buy $1 for NZ$3, sell NZ$1 for MXP2, and sell MXP2 for $1. This gives us a profit of $0.04. As more people engage in this arbitrage, the demand for NZ$ will increase, causing its value to appreciate against the US dollar. Similarly, the demand for MXP will decrease, causing its value to depreciate against the US dollar.

Assume the Following Exchange Rates: $1 = NZ$3, NZ$1 =