The New Zealand dollar to U.S. dollar exchange rateis 1.36, and the British pound to U.S. dollar exchangerate is 0.62. If you find that the British pound to NewZealand dollar were trading at 0.49, what would youdo to earn a riskless profit?
Question
The New Zealand dollar to U.S. dollar exchange rateis 1.36, and the British pound to U.S. dollar exchangerate is 0.62. If you find that the British pound to NewZealand dollar were trading at 0.49, what would youdo to earn a riskless profit?
Solution
This scenario describes an opportunity for arbitrage, which is the practice of taking advantage of a price difference between two or more markets. Here's how you could make a riskless profit:
-
Start with a certain amount of British pounds. Let's say 100 pounds for simplicity.
-
Convert the British pounds to U.S. dollars. With the exchange rate of 0.62, you would get 62 U.S. dollars.
-
Now, convert the U.S. dollars to New Zealand dollars. With the exchange rate of 1.36, you would get 84.32 New Zealand dollars.
-
Finally, convert the New Zealand dollars back to British pounds. With the exchange rate of 0.49, you would get 41.31 pounds.
You started with 100 pounds and ended up with 41.31 pounds, which means you would have lost money in this process. Therefore, there is no opportunity for a riskless profit in this scenario.
Similar Questions
Suppose 0.5 British pounds (£) trade for one (1) Australian dollar ($), the Australian price level equals $3.6 per good, and the British price level equals £2 per good.What is the real exchange rate in British goods per Australian good, rounded to two decimal points?a.0.90b.1.11c.0.56d.1.80
Consider the bilateral exchange rate between Australia and New Zealand. Suppose $1 AUD buys $1.05 NZD, the Australian price level is $100 AUD and the New Zealand price level is $110 NZD. Which of the following is TRUE?Group of answer choicesThe Australian dollar has more real purchasing power than the New Zealand dollarIn the long run, the New Zealand dollar is likely to depreciate against the Australian dollarThe real exchange rate is 0.90The real exchange rate is 1.10
The demand and supply of pounds are D2 and S2. An increase in British demand for U.S. exports, ceteris paribus, couldGroup of answer choicesincrease the exchange rate ($/pound) to $2.50.decrease the exchange rate ($/pound) to $1.50.decrease the equilibrium quantity from 400 to 300 pounds.increase the demand for pounds from D2 to D1.
Suppose that the current exchange rate is €0.80 = $1.00. The direct quote, from the U.S. perspective isGroup of answer choicesnone of the options€0.80 = $1.00.£1.00 = $1.80.€1.00 = $1.25.
Suppose that the current exchange rate is £1.00 = $1.50. The indirect quote from the U.S. perspective is
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.