Answered: is the cross-rate in terms of yen per…

is the cross-rate in terms of yen per pound? B. Suppose the cross - rate is ¥136 = £1. Is there an arbitrage opportunit- here? If there is, explain how to take advantage of the mispricing.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter17: Multinational Financial Management

Section: Chapter Questions

Problem 6MC

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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

Suppose the Japanese yen exchange rate is ¥105 = $1, and the British pound exchange rate is £1 = $1.34. A. What
is the cross-rate in terms of yen per pound? B. Suppose the cross - rate is ¥136 = £1. Is there an arbitrage opportunity
here? If there is, explain how to take advantage of the mispricing.

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