Following are the direct quotes available in the international market: GBP1 = EURO 1.2950/65 (Direct rate) GBP1 = USD 1.6025/6000 EURO1 = USD…

(i) Ask Cross Rate for Euro Per Pound = USD / GBP Ask / USD / Euro Bid = 1.6025 / 1.2375 = Euro 1.2950/GBP Bid Cross Rate for Euro Per Pound = USD / GBP Bid / USD / Euro Ask = 1.6000 / 1.9000 = Euro 0.8421/GBP Final Quote: GBP 1 = EUR 0.8421 / 1.2950 (ii) Calculation of Arbitrage Gain/Loss (1) Buying Pound against Euro under direct route Euro 1.2965 Selling Pound against Euro through Cross Route Euro 0.8421 Loss per Pound Euro 0.4544 (2) Buying Pound against Euro through Cross Route Euro 1.2950 Selling Pound against Euro under direct route Euro 1.2950 Loss per Pound Nil Arbitrage is not possible – Proof (1) If you want to buy Pounds against Euro, under the direct route, you can acquire Pound at the quoting bank's selling rate of Euro 1.2965/Pound. If you sell Pounds under cross rate route, you can sell Pound at the Cross-rate Bid price calculated in (i) above i.e. 08421/ Pound resulting in a loss of 0.4544 Euros. Hence arbitrage is not possible. (2) If you want to sell Pounds against Euro, under the direct route, you can sell Pounds at the quoting bank's buying rate of Euro 1.2950/ Pound. If you buy Pounds under cross rate route, you can get Pounds at the Cross rate Ask price calculated in (i) above i.e. 1.2950/ Pound resulting in no profit no loss hence arbitrage is not possible.