Question

A Paris bank offers to both buy and sell pounds for 1.5581 euros per pound. A London bank is willing to both buy and sell euros for 0.6537 pounds per euro. Assume you are a large money center bank who can trade currency with both the london and paris banks. Suppose you have 200,000 pounds. Determine a way to make a profit from this situation by converting the pounds to euros and then back again.

1. When you convert the pounds to euros, how many euros will you receive?

2. When you convert the euros back to pounds, how many pounds will you receive?

3. What will be the profit you make in pounds?

Answer 1

Information given: -

Amount of currency in hand = £200,000

Number of euros per pound (Paris bank) = €1.5581

Number of pounds per euros (London bank) = £0.6537

1.) Number of euros after conversion = number of pounds * Euro currency rate

= £200,000 * 1.5581

= €311,620

2.) Number of pounds after conversion = number of euros * Pound currency rate

= €311,620* 0.6537

= £203706

3.) Profit on the conversion

= Amount of pounds after conversion -Amount of pounds before conversion

= £203706 - £200,000

= £3,706