The US Dollar Spot Exchange Rate with the Australian Dollar Is

question 95

Multiple Choice

The U.S. dollar spot exchange rate with the Australian dollar is $1 = AU$1.2835. The U.S. dollar and euro exchange rate is $1 = €0.7605. If the cross-rate between the euro and Australian dollar is €1 = AU$1.610 then show that an arbitrage is possible. What positions should be taken to profit from the mispricing?

• A) Starting with U.S. dollars, buy Australian dollars and convert them to euros, then convert back to U.S. dollars.
• B) Starting with U.S. dollars, buy euros and convert them to Australian dollars, then convert back to U.S. dollars.
• C) Starting with euros, buy U.S. dollars and covert them to Australian dollars, then convert back to euros.
• D) Starting with Australian dollars, buy euros and convert them to U.S. dollars, then convert back to Australian dollars.

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Definitions:

Price Discrimination

A pricing strategy that sells the same product or service at different prices to different customers, often based on willingness to pay, market segment, or purchase volume.

Less Elastic

Describes a demand that is relatively unresponsive to changes in price, indicating that consumers' buying habits do not significantly alter with price fluctuations.

More Elastic

Describes demand that is highly sensitive to changes in price, where consumers significantly alter their quantity demanded with slight price variations.

Price-Discriminating Firm

A company that engages in the practice of charging different prices for the same product in different markets or segments.