2 Suppose that the pound is pegged to gold at 20 per ounce a

2) Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to gold at $35 per ounce. This implies an exchange rate of S1.75 per pound If the current market exchange rate is $1.80 per pound, how would you take advantage of this situation? (Assume that you have $350 available for investment.) (10 points)

Solution

Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce.

Convert the gold to £200 at £20 per ounce.

Exchange the £200 for dollars at the current rate of $1.80 per pound to get $360

Profit = $360 - $350 = $10