Question

1. The U.S.-pound exchange rate is 1.20 $ / £.  The U.S.-Indian rupee exchange rate is 70 rupees / $.  

   Suppose the Indian rupee / £ exchange rate is 80 rupees / £ and notwhat you calculated in part a.  If you had $1,000, explain how you could turn that into more than $1,000 in three exchange rate transactions using the exchange rates above.  

Circle rupees or pounds, put numbers in blanks.

Change the $1,000 into _________________ (rupees or pounds).

Take those (rupees or pounds) and change them into _______________  (rupees or pounds).

Take those (rupees or pounds) and change them into $ _____________________.

Answer 1

The answer is given below

Change the $1,000 into Pounds (rupees or pounds).

Take those (rupees or pounds) and change them into Rupees (rupees or pounds).

Take those (rupees or pounds) and change them into $1025

This is because in the the exchange rates give nat the top we note that (dollar to rupee rate/dollar to pound rate) which gives a pseudo rupee/pound rate is more favourable than the actual rupee to pound rate(80rupees/pound). To take advantage of this we convert the dollars first to rupees which is given below

1000 dollars gives us 1000*70= 70,000 rupees

Now, 1 pound = 80 rupees. So we convert it to pounds = 70000/80 = 875 pounds

Now converting pounds to dollar we have = 875*1.2 = 1050 dollars

Hence we have gained an additional 50 dollars through this transaction