Question

Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120. Group of answer choices ¥192/€1.00 €1.25/¥1.00 €1.00/¥1.92 €1.92/¥100

Answer 1

Answer:

¥192/€1.00

Explanation:

In order to determine the cross rate, we need a formula such that the dollar sign in one exchange rate cancels the other dollar sign in the second exchange such that we are left with both Yen and the Euro as shown by the formula below:

S(€/¥) = S($/¥) / S($/€)

S($/¥) =$1/¥120

S($/€)=$1.60/ €1.00

S(€/¥) =($1/¥120)/($1.60/ €1.00)

if we change the division to multiplication we would have the below

S(€/¥) =$1/¥120*€1.00/$1.60

S(€/¥) =€0.005208333

This means that €0.005208333 =1¥

1¥/ €0.005208333=¥192