Homework Answers
We are given:
- GBP/Gold = GBP 800 per ounce
- USD/Gold = USD 1200 per ounce
- So the USD to GBP cross rate is calculated below:
- GBP 800 = USD 1200
- GBP 1 = USD 1200/800
- GBP 1 = USD 1.5
- So implied rate is $1.5 per pound while the actual rate is $1.8 per pound
- Therefore we have an arbitrage opportunity:
- We use USD 1200 to buy 1 ounce of Gold
- We sell this one ounce of gold in return of GBP 800
- We convert this GBP 800 to USB at the exchange rate of $1.8 per
pound
- So we will have 800 x 1.8 = USD 1440
- So We started with USD 1200 and without any extra risk, ended up with USD 1440
Add Answer to:
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