Final answer:
The student's question relates to identifying and exploiting an arbitrage opportunity in currency exchange involving Canadian dollars, US dollars, and Mexican pesos by analyzing the given exchange rates.
Step-by-step explanation:
The student is asking about arbitrage in the context of foreign exchange markets. Specifically, the question refers to the trading of Canadian dollars (CAD), US dollars (USD), and Mexican pesos (MXN), and whether there is an opportunity to profit from price differences in the currency exchange rates provided.
Given the exchange rates USD0.7047/CAD, MXN6.4390/CAD, and MXN$8.7535/USD, one needs to check if these rates are aligned or if there is a discrepancy that allows for arbitrage. Arbitrage exploits the price differences to buy in one market and sell in another for a profit.
By calculating the implied cross-rates between the currencies, we can identify if there's a mismatch that presents an arbitrage opportunity. If there is, to exploit this opportunity, a trader would execute trades in the sequence that leads to a net profit, due to the mispricing of the exchange rates. This involves converting one currency to another sequentially based on the quoted prices ensuring the end amount in the initial currency is higher than the starting amount.