Question

In 1997, the pegged $/baht rate was 0.04 $/baht, but the equilibrium exchange rate was estimated to be 0.03 $/baht. An investor could have made a profit by doing which of the following?

Answer 1

To make a profit, the investor would need to take advantage of the difference between the pegged exchange rate and the estimated equilibrium exchange rate. They could buy baht at the lower pegged rate and then sell it at the higher equilibrium rate. However, currency exchange rates can be unpredictable, and there is always a risk involved.

Step-by-step explanation:

To make a profit in this scenario, the investor would need to take advantage of the difference between the pegged exchange rate of 0.04 $/baht and the estimated equilibrium exchange rate of 0.03 $/baht. Since the equilibrium rate is lower, the baht is considered to be undervalued. The investor could buy baht at the lower pegged rate and then sell it at the higher equilibrium rate to make a profit.

For example, let's say the investor has $1,000. With the pegged rate of 0.04 $/baht, the investor could buy 25,000 baht. If the investor then sold those baht at the equilibrium rate of 0.03 $/baht, they would receive $750. This would result in a profit of $750 - $1,000 = -$250.

However, it's important to note that this is a hypothetical scenario and market conditions can be unpredictable. Currency exchange rates can fluctuate due to various factors, and there is always a risk involved in foreign exchange trading. It's important for investors to carefully consider their options and seek professional advice.