Question

If a pair of shoes in the United States costs $45, and a pair of the exact same shoes is sold in Mexico for 430 pesos while the exchange rate is E = $0.1100/pesos, what arbitrage opportunities exist (if any)? Ignoring transactions costs, explain how you would take advantage of this.

Answer 1

The correct answer is profit of $2.3 by selling it in Mexico.

Step-by-step explanation:

According to the scenario, the computation of the given data are as follows:

In the United states Cost of shoes = $45

In Mexico, Cost of Shoes = 430 Pesos ( where $0.1100 = 1 pesos)

So, 430 Pesos = 430 × $0.1100 = $47.3

So, we can calculate the profit to sell in Mexico as follows:

Profit to sell in Mexico = Sell price in Mexico - Sell price in US

= $47.3 - $45

= $2.3

So, the arbitrage opportunity exist by buying the shoes in Pesos and selling it in Mexico, one can make a profit of $2.3 per shoes.