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28 July, 11:03

pdf Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to gold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current market exchange rate is $1.80 per pound, how would you take advantage of this situation? Hint: assume that you have $350 available for investment.

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  1. 28 July, 11:08
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    1) Buy 10 ounces of gold with the 350 dollars

    2) Sell the 10 ounces of gold for £200

    3) Exchange £200 for 360 dollars

    Explanation:

    Due to the difference between the exchange rate in gold and currency, a 2.1% (1.80 / 1.75) advantage can be obtained.

    You start in the gold market with 350 dollars which are equal to 10 ounces of gold which are equal to £200. This according to the gold prices, witch generate a 1.75 exchange rate.

    Then you go to the financial market where the exchange rate is larger (1.80) and with the £200 you get 360 dollars.
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Home » Business » pdf Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to gold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current market exchange rate is $1.
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