Question

True, False or Uncertain

If the $C exchange rate with the $US was 1 and the $C exchange rate with the Euro was 1.50, while the $US exchange rate with the Euro was 1.25, you could make a fortune trading these currencies.

Answer 1

TRUE

given

1 USD = 1 Canadian dollar

1 EURO = 1.25 USD

1 EURO = 1.5 Canadian dollar

Suppose that you have 1 Euro and (we are assuming that there are no cost of exchanging currencies)

A) if you dirctly exchange it with USD you will get 1.25 USD

B) for gain you first exchange it with Candian dollar, after currency exchange you will get 1.5 Canadian dollar

now exchange 1.5 Canadian dollar with USD you will get 1.5 USD (as the exchange rate are equal).

again exchange USD with EURO

as 1 EURO = 1.25 USD

1 USD = 1 / 1.25 EURO

1.5 USD = 1.5/1.25 EURO

1.5 USD = 1.2 EURO

You had 1 EURO and now you have 1.2 EURO

There is a gain of 0.2 EURO by just exchanging currencies these step can be done repeatedly untill exchange rate corrects itself.