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.
A) (a) ¥78.36, (b) No arbitrage opportunity
B) (a) ¥136, (b) Arbitrage opportunity
C) (a) ¥105, (b) No arbitrage opportunity
D) (a) ¥136, (b) No arbitrage opportunity
