Question 1:

A foreign exchange trader and speculator observes the following exchange rates between the French franc, the Japanese yen and the German mark:

one mark = 2.25 francs one franc = 46 yen one yen = 0.009 marks.

Given these rates, the trader should

1. speculate by purchasing francs with marks, then yen with francs, and then marks with yen.

2. conduct arbitrage by purchasing francs with marks, then yen with francs, and then marks with yen.

3. speculate by purchasing yen with marks, then francs with yen, and then marks with francs.

4. conduct arbitrage by purchasing yen with marks, then francs with yen, and then marks with francs.

Choose the option that yields the correct answer.