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You are a French trader with $10,000 to invest. The dollar-euro exchange rate is quoted as $1.20 = €1.00 and the dollar-pound exchange rate is quoted at $2.15 = £1.00. If a bank quotes you an exchange rate of £1.00 = €1.70, do you think you will be able to make a profit out of these quotes? How can you make money?

Respuesta :

TomShelby

Answer:

The profit cycle will be:

Dollar to Euro --> to pounds --> to Dollars

This yields a gain of 537.71 dollars

Explanation:

Dollar to Euro: 1.2 = 1

Then Dollar to Pound: 2.15 = 1

So: 1.2 Euro = 2.15 Pounds

1 Euro = 2.15 / 1.2 pounds = 1.791667

bank quote: 1 pound = 1.70 euro

the bank rate allows for arbitrary as it is not in equilibrium with the other exchange-rates

We will convert the 10,000 dollars into Euro: 8,333.33 Euro

Then we convert this into pounds: 8,333.33 / 1.7 = 4,901.96 pounds

Finally you convert the Britain currency into US currency again:

4,901.26 x 2.15 = 10,537.709‬

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