Question

Suppose that the British pound is pegged to gold at £6 per ounce and one ounce of gold is worth France Franc of 12 (FF12). The exchange rate is FF1.8/£ and you have FF11, 000. How much profit can you make? (Assume zero shipping costs)

Answer 1

Sol:

British pound is pegged to gold = £6 per ounce

One ounce of gold is worth France Franc of 12 (FF12)

Exchange rate = FF1.8 / £

You have FF11, 000

To determine profit can you make:

First we have to exchange the France Franc with Pound at current exchange rate = 11,000 / 1.8 = 6,111.11 pound

Now buy gold using pound = 6,111.11 / 6 = 1,018.52 ounce.

Sell gold for France Franc = 1018.52 ounce * 12 France Franc = 12,222.22 France Franc

Profit = 12.222.22 France Franc - 11,000 France Franc = 1,222.22 France Franc

Therefore profit can you make will be 1,222.22 France Franc