Question

Assume you have £260 and can exchange C$450 for £260. Also assume you can exchange $1 for C$1.06 and £1 for $1.62. How much arbitrage profit in pounds can you earn? (Ignore transaction costs.)

		£2.44
		£2.26
		£2.05
		£1.81
		£1.63

Answer 1

Steps involved in arbitraging

(i) Convert pounds into C$

260 pounds = C$450

(ii) Convert C$ into $

1$ = C$1.06

C$450 = 450/1.06$

= 424.5283$

(iii) Convert $ into Pounds

1 Pound = 1.62$

424.5283$ = 424.5283/1.62 Pounds

= 262.05 Pounds

(iv) Hence, due to arbitraging, 260 Pounds are converted into 262.05 pounds.

Hence, arbitrage profit = 262.05 - 260

= 2.05 Pounds

Correct option is (c)

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