PLEASE ENSURE THAT YOU READ EACH QUESTION CAREFULLYSO THAT YOU KNOW WHAT I AM ASKING, WHAT IS IMPORTANTINFORMATION, AND WHAT IS EXCESS INFORMATIONProblem 1Given the following banks are offering the following Bid and Ask on the US $/Mexican Peso.($/MXP) BID ASKBank A 0.75 0.78Bank B 0.73 0.75Bank C 0.77 0.79Bank D 0.76 0.79Bank E 0.75 0.77#1 Decide if any arbitrage opportunities exist. If there is/ are arbitrage opportunity(s), please describe them.Bank A 0.75 0.78Bank B 0.73 0.75Bank C 0.77 0.79Bank D 0.76 0.79Bank E 0.75 0.77 banks will buy banks will sell x pesos for 1$ x pesos for 1$- Buy low and sell high. Bank B (Ask price) has undervalued the MxP and overvalued the US$. Therefore you want to sell the overpriced currency (US$) and purchase the undervalued currency (MxP) at Bank B. Bank C (Bid price) has overvalued the MxP and undervalued the US$. Therefore you will want to sell the MxP to Bank C and buy the US$ at Bank C.#2 You are given $1 million to take advantage of any arbitrage opportunity in the mispricing of the US $ and the Mexican Peso. Your goal is to make the most money possible. Being extremely specific describe, step-by-step, what arbitrage trade you would engage in to achieve your goal. Show your calculations.- Go to Bank B where the conversion rate is $0.75/MXP (or 1.33 MXP/$) and convert (sell) US$ into MXP (buy).- Now you have 1,333,333 MXP- Go to Bank C and convert MXP to US$ using exchange rate of $0.77/MXP- Now you have $1,026,667. - $1,026,667 - $1,000,000 = $26,667#3 How much profit would you make?$26,667#4 Describe in painstaking detail how the market will return to equilibrium. Market forces will correct this arbitrage opportunity. The increase inDEMAND for MXP at Bank B from you), will cause the ask price to increase.When there is more demand for something and the SUPPLY remains unchanged,the price you must pay for it rises. Thus, Bank B will raise its ask price due to the change in demand. Secondly, as you sell more MXP to Bank C, the SUPPLYof MXP at Bank C will increase. Assuming, the DEMAND for MXP at Bank C remains the same, the price Bank C is willing to pay to accumulatemore MXP will decrease. It will soon match other asking prices; it isthen that the opportunity for arbitrage no longer exists.Problem 2Last quarter Canada gathered the following economic data (in Canadian dollars) related to the listed transaction/items :Canadian export products CAD 2.3BCanadian export of services CAD 1.0BImport of products into Canada CAD 1.8BService provided by foreign based companies to Canada CAD 1.1BRepatriation of CAD from foreign subsidiaries of Canadian companies back into Canada CAD 700MForeign investment in Canadian financial assets CAD 1.0BCanadian investment in foreign assets CAD 1.5BForeign investment in Canadian real estate CAD 1.1B#1 Break down Canada’s Balance of Payment account into Current Account and Capital Account. Quantify each account, detailing which items (listed above) belong in each account, whether each transaction/item is considered a credit or debit to the BOP.Current Account= Exports –Imports +/- Unilateral TransfersCapital Account = Inflows – OutflowsInflows = Foreign investment in Canadian financial assets + Foreign investment in Canadian real estateOutflows = Canadian investment in foreign assets Current Account BOP Canadian export products 2.3B CreditCanadian export of services 1.0B CreditImport of products into Canada CAD 1.8B DebitServices provided by foreign based companies to Canada 1.1B DebitRepatriation of CAD from foreign subs of Canadian companies back into Canada 700M CreditVALUE= 1.1 Billion CADCapital AccountCanadian investment in foreign assets 1.5 B DebitForeign investment in Canadian financial assets 1.0B CreditForeign investment in Canadian real estate 1.1B CreditVALUE 600 Million CADBalance of Payments = CA + KA = 1.1B + 0.6B = 1.7B CAD#2 Assume that Canada follows a floating rate currency regime. How much foreign reserves must Canada use to achieve its currency goals? In painstaking detail, describe how your answer allows Canada to achieve its currency goal.How much foreign reserves does Canada need to inject into the Fx market … Zero.Since Canada follows a floating rate regime, it will allow the free market to determine the exchange rate of the Canadian dollar. Consequently, Canada’s central bank will not intervene.#3 Leaving Canada behind, assume that any country records a deficit for its Balance of Payment. How would this deficit affect the country’s currency on the spot market? Explain/support your view in great detail.If a country has a BOP deficit, more money has left the country than flowed into the country. This will require the country’s investors/importers/MNEs to sell the domestic currency and purchase foreign currencies to pay for thegood/services/investments received. This “new” supply of the country’s currency will exceed the demand for its currency from foreign investors/importers/MNEs. The resulting increase in supply will result in the currency depreciating. Going one step further (just for your info) ......Eventually, the depreciation of the local currency will result in exports (domestic good + services) and domestic assetsbecoming less expensive to trading partners and imports (foreign good + services) and foreign assets becoming more expensive to local consumers/investors/MNEs. The result is the country we are looking at will be able to export more and imports less reducing the BOP deficit and helping the currency to appreciate.Problem 3Given the following exchange rates calculate the Yen/US$ exchange rate.112.75 Yen/Euro 1.7960 NZD/Euro 0.01254 SFR/Yen9.5378 HKD/Euro 0.12831 US$/HKD 0.68140 US$/NZD(Yen/Euro) x (1/(NZD/Euro)) x (1/(US$/NZD)) = Yen/US$(112.75) x (1/1.7960) x (1/0.68140) = 92.1315 Yen/US$Problem 4The following banks are advertising the listed pair (two currency) exchange rates: Banco Santander (BS) 0.01085 US $/YenToronto Dominion (TD) 7.5047 Kroner/ CADBarclays Bank (BB) 92.1659Yen/ US$Lloyd’s Bank (LB) 8.8030 Kroner/US$Citicorp (CB) 8.8030 Kroner/US$Socgen (SB) 11.8070 Yen/Kroner#1 Describe the arbitrage opportunity that exists. Which bank is about to loss some money courtesy of your intimate knowledge of currency arbitrage ? Which