QUESTION 1
1a) Assume the cross-rate trader at Deutsche Bank notices that Credit Monaco is buying dollars at S(€/$)= 0.7638, the same as Deutsche Bank’s bid price. Similarly, he observes that Barclays is buying British pound at S ($/£) =1.5400, also the same as Deutsche Bank. He next finds that Credit Agricole is making a direct market between euro and the pound, with a current ask price of S(€/£)=1.1705. Outline the arbitrage opportunities
1b) Briefly discuss the difference between Transaction exposure and Translation exposure.