in the usa you have a forex quotes of $1.11/euro and 18% pesos/$... in Europe the...
in the usa you have a forex quotes of $1.11/euro and 18% pesos/$... in Europe the peso is selling for 22 pesos/ euro... you have a $1,000,000 to invest..
a. given there are unrestricted flows of capital between the two countries , what would you do and how much money could you make?
b. what should the peso/euro rate really be?
c. Taking advantage of this disequlibrium is know as taking advantage of an_______ opportunity
Homework Answers
a. since Peso is cheaper against Euro when purchased in Europe, we should buy Euro against the USD we have, use these Euros to buy Peso in Europe, and then sell these Pesos in the US to acquire USD, to make profit
step 1: buy 1000000 / 1.11 Euro with our million dollars, we get 900900.9 Euro
step 2: buy 22 x 900900.9 Pesos in Europe, we get 19819819.8 Pesos
step 3: buy 19819819.8 / 18 USD in the US, we get 1101101.1 USD, whichs is 101101.1 more than we began with
b. the peso / euro rate should be a cross rate between usd/euro and peso/usd per the following formula
peso / euro = (peso / usd) x (usd / euro)
= (18 / 1) x (1.11 / 1)
= 19.98 Peso / Euro
c. taking advantage of this disequilibrium is known as taking advantage of an arbitrage opportunity
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