1 EUR=1.1 USD
In order to get the % change in the value of the currency –using direct quote;
a) Change in the value = (new exchange rate – beginning rate)/beginning rate.
Therefore; the new exchange rate = ((change in the value * beginning rate) +beginning rate)
New exchange rate= ((0.02*1.1) +1.1) =1.1220
Therefore new exchange rate = EURUSD 1.1220
b) The above means 1EUR=1.1043 USD
And 1GBP=1.2970 USD
Using the indirect quote;
1EUR=1.1043 will be; 1USD=0.9056 EUR
And 1USD=0.7710 GBP
Therefore; 0.7710 GBP = 0.9056 EUR
1 GBP= (0.9056/0.7710)
GBPEUR 1.1746
c) A triangular arbitrage is defined as a trading strategy that exploits the arbitrage opportunity that exists among three currencies in a foreign exchange market due to price discrepancies. The price discrepancies often arise from situations when one market is overvalued while another is undervalued.
For example in part b) above;
Using cross rate formula;
GBPEUR=0.9056*1.2970 =1.1746
The cross rate for the pairs must be equal. In the case above there is no triangular arbitrage. Since the cross rate for the pairs is equal to the value of GBPEUR in b)
If GBPEUR rate is undervalued, that is less than 1.1746 there exists an arbitrage opportunity.
Carolinemakenamutwiri answered the question on February 16, 2019 at 12:40
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