Suppose the japanese yen exchange rate is ¥73.47 = $1, and the british pound exchange rate is £1 = $1.53. a. what is the cross-rate in terms of yen per pound? (do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16. do not include the yen sign (¥ cross-rate ¥ b. suppose the cross-rate is ¥115 = £1. what is the arbitrage profit per dollar? (do not round intermediate calculations and round your answer to 4 decimal places, e. g., 32.1616.) arbitrage profit per dollar $

Cross-rate can be found by using the given formula ,

So,

Substituting this into the exchange rate for Yen and dollars, we get

Cross-rate in terms of Yen per Pound is 112.41

b. If cross-rate is , this means that Yen is quoted high relative to pound. So, the arbitrage profit per dollar will be,

Suppose we take a a loan for $1 and buy £0.6536. Then we use the pounds to purchase yen at the cross-rate, so we have

£0.6536 (¥115/£1) = ¥75.164

Now, we replay the loan in dollars by exchanging Yen back to dollars. The cost to repay will be:

¥75.164($1/¥73.47) = $1.02305

Your arbitrage profit is $0.02305 per $1 used.

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