Suppose you observe the following exchange rates: €1 = $.85; £1 = $1.60; and €2.00 = £1.00.Starting with $1,000,000,how can you make money?

Question

Quizplus · Accepted Answer

By starting with $1 million, we can convert it into pounds at a rate of £1 = $1.60, giving us £625,000. We can then use this to purchase €1,250,000 at a rate of €2.00 = £1.00. Finally, we can convert the €1,250,000 back into dollars at a rate of €1 = $0.85, which will give us $1,062,500. This represents an arbitrage profit of $62,500.

Suppose You Observe the Following Exchange Rates: €1 =