Suppose that the price of gold in U.S. dollars is $1,000, that the exchange rate between Australian dollars and U.S. dollars is $0.75 to 1 Australian dollar, and that an ounce of gold can be purchased in Australia for 1,300 Australian dollars. Show how an investor can earn an arbitrage profit in this situation.

2. Matthew’s Sports Importing Emporium Incorporated (Mat’s) is considering signing contracts that will obligate the firm to purchase 100,000 Euros’ worth of electronic time-keeping equipment at the end of each calendar quarter for the next 2 years. Mat’s is also signing a contract with a major university system that will purchase this equipment from Mat’s at a price of $125,000 (U.S.) per quarter.

a. What would Mat’s profit or loss be each quarter if the exchange rate is $1.10 per Euro throughout the life of the contract?

b. What would Mat’s profit or loss be if the value of the Euro rose by $0.05 per quarter starting at $1.15 in the first quarter and ending at $1.50 in the eighth quarter?

Answer rating: 100% (QA)

1 To earn an arbitrage profit the investor can follow these steps Convert 1000 into Australian dolla... View the full answer