Suppose one observed the following direct spot quotations in New York and London,respectively: 1.2500-60 and 0.8000-50. Arbitrage profits per $1 million equal(a) $637(b) $0(c) $1,268(d) $4,492(e) None of the above

To answer this question, we first need to understand the concept of arbitrage. Arbitrage is the practice of taking advantage of a price difference between two or more markets, striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.

The direct spot quotations given are in the format of bid-ask prices. In New York, the bid price is 1.2500 and the ask price is 1.2560. In London, the bid price is 0.8000 and the ask price is 0.8050.

The arbitrage opportunity here would be to buy low and sell high. Specifically, one could buy currency in London at the lower ask price and then sell it in New York at the higher bid price.

First, we need to convert the London quote to USD/AUD (from AUD/USD) by taking the reciprocal of the London prices. The converted London prices are 1.25 (1/0.8000) - 1.25 (1/0.8050).

Now, let's calculate the arbitrage profit:

1. Buy in London at the ask price: $1 million * 1.25 (converted London ask price) =$1.25 million AUD.
2. Sell in New York at the bid price: $1.25 million AUD * 1.2500 (New York bid price) =$1,562,500 USD.

The profit would be the selling price minus the buying price: $1,562,500 -$1,000,000 = $562,500.

So, the correct answer is (e) None of the above. The arbitrage profit per $1 million would be$562,500, not any of the options given.