Question

Lesson 7: Principles of Market Valuation

7.1     Find a website that shows exchange rates for all major international currencies. One such site is XE.com. Another is oanda.com.                                                                          (10 marks)

1. What is the current exchange rate between the Canadian dollar and the US dollar?   (2 marks)
2. XE.com allows you to see current exchange rates for gold ounces (type “gold” into the From or To box).         (4 marks, 1 each)

i.    What is 1 ounce of gold worth in Canadian dollars?

ii.   In US dollars?

iii. What does this imply is the exchange rate between Canadian dollars and US dollars?

iv. Is this the same as your answer to part a?

3. If you saw that the US dollar price of gold was one dollar less than the price you quoted in b.ii., how could you use that information to make an arbitrage profit?

To get full marks, you have to show a full “round turn.” That is, you need to start and end with the same currency to show the amount of your profit.                                           (4 marks)

Answer 1

Answers

a) Using XE.com, the current exchange rate between the Canadian dollar and the US dollar is as follows :

• 1 CAD = 0.758643 USD
• 1 USD = 1.31814 CAD

(Please note, exchange rates are market driven and keep fluctuating. This is as of 2019-12-05 05:46 UTC)

b) Exchange rate for Gold

i) 1 ounce of Gold in CAD = 1,947.83 CAD ( retrieved as of 2019-12-05 05:48 UTC)

ii) 1 ounce of Gold in USD = 1,477.79 USD ( retrieved as of 2019-12-05 05:50 UTC)

iii) As per rates of gold in USD and CAD, the exchange rate is as follows :

• 1 CAD = 0.758685 USD ( calculated as 1,477.79 USD/1,947.83 CAD)
• 1 USD = 1.31807 CAD ( calculated as 1,947.83 CAD/ 1,477.79 USD)

iv) The values are not same as that in part (a) and start differing from 5th decimal place onwards. Hence, any trade in excess of 100K will have aribtrage options.

c) If the price of 1 ounce of Gold in USD is 1,476.79 USD ($1 less than (b) ii), then the information could be used in following way to earn arbitrage profit.:

• Buy 100 ounces of gold as per USD rates (since its lower ) , hence you will end up spending USD 147,679 to get 100 ounces of gold.
• Now sell this 100 ounces of Gold at CAD rates and you would get CAD 194783
• Now exchange CAD currency with USD currency as per prevailing currency exchange rates in the market. Using information in part (a), as per prevailing exchange rate of 1 CAD = 0.758643 USD, you will get
  • USD 147,770.8 in exchange of canadian dollars(calculated as 194783 *0.758643)
• Hence you would end up making a profit of USD 91.9 (Calculated as 147770.8-147,679 ) for every 100 ounces, in the arbitrage opportunity as explained in the round turn transaction.