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The New Zealand dollar to U.S. dollar exchange rate is 1.36, and the British pound to U.S. dollar exchange rate is 0.62. If you find that the British pound to New Zealand dollar were trading at 0.49, what would you do to earn a riskless profit

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tutorAnne

Answer: To earn a riskless profit, you will need $.05 per US dollar invested.

Explanation:

First, I would Exchange $1 USD into New Zealand dollars, This would give me;

1.00 x 1.39 = $1.39 NZD. Then, I would Exchange NZD to British Pounds to give me

1.39 x .47 = £0.65. Lastly I would Exchange British Pound back to USD which would be

I USD= £0.62

Therefore £0.65 to dollar gives

= 0.65 x ($1/£.62) = $1.05 USD

Therefore my riskless profit becomes $.05because

$1.05 - $1.00 = $.05 per US dollar invested.

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