Suppose $1 = 10.5 pesos in New York and $1 = 9.6 pesos in Mexico City. If you had $10,000 using arbitrage, your profits would be:
A) $937.50.
B) 937 pesos.
C) 9,600 pesos.
D) $790.

Question

Quizplus · Accepted Answer

By exchanging $10,000 in New York, you get 105,000 pesos (10,000 * 10.5). Converting those pesos back to dollars in Mexico City at a rate of 9.6 pesos per dollar gives you $10,937.50 (105,000 / 9.6). Subtracting the original $10,000 leaves a profit of $937.50.