Question

Currency A is worth $2 in the spot market. Currency B is worth $3 spot. Currency B costs  

                             1.6 units of currency A. You have $30000 to try to generate arbitrage with. If you are

                            successful what will be your $ gain?

1. $200
2. $500
3. $1000
4. $2000
5. None of the above.

Answer 1

One can ARBITRAGE through buying the Currency B in the Spot market and then converting into Currency A at the prevailing exchange unit rate.

Like if one has $30000 of money, he will buy currency B of all Money (30000/3)=10000 units

Now one can convert the 10000 units of currency B into Currency A through prevailing exchange unit rate(10000×1.6)= 16000 units

Now Currency units will be converted into Spot markets=( 16000×$2 per unit)=$ 32000

Total gain= (32000-30000)=$2000

So correct option would be option (D) $2000