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CMA Final · Strategic Financial Management · The International Financial Environment

Spot EUR/INR is ₹90.00 and USD/INR is ₹83.00. A dealer quotes EUR/USD at 1.1000 while the cross rate implied by the INR quotes is 90/83. An arbitrageur with ₹83,00,000 finds the quote differs. Starting with rupees, buying USD, converting to EUR at 1.1000... the implied cross EUR/USD from INR rates is closest to:

The implied cross rate is the euro rupee price divided by the dollar rupee price, 90 divided by 83, which equals about 1.0843 dollars per euro. The quoted 1.1000 differs, indicating a triangular arbitrage opportunity.

  1. A1.0843Correct
  2. B0.9222
  3. C1.1000
  4. D1.0000

Explanation

Implied EUR/USD = 90/83 = 1.0843. The quoted 1.1000 is higher, so EUR is overvalued in the direct quote versus the cross. Option B is the inverse, USD per EUR flipped.

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