Question

Foreign Exchange

USD/NOK (Norway) 10.30

USD/HKD (Hong Kong) 7.75

NZD/USD (New Zealand) 0.62

USD/KRW (Korea) 1210

Use the above currency exchange rates for problems 1-3 below.

1. If you convert 100 Norwegian Krona (NOK) into New Zealand Dollars (NZD), how many NZD would you have? (3)

2. How many Norwegian Krona (NOK) does it take to buy 100 Hong Kong Dollars? (3)

3. One ounce of gold costs $1700 US. One ounce of gold also costs 2,000,000 Korean Won (KRW). Describe the steps to earn a riskless profit using these prices and the currency rates above. (3)

Answer 1

First we need to understand what these exchange rates mean:

USD/NOK (Norway) 10.30 means that USD1 = NOK 10.30

USD/HKD (Hong Kong) 7.75 means that USD1 = HKD 7.75

NZD/USD (New Zealand) 0.62 means that NZD1 = USD 0.62

USD/KRW (Korea) 1210 means that USD1 = KRW 1210

No we can answer the questions

Q1.

NOK 10.30 = USD 1

Therefore, NOK 1 = USD 1/10.30

And NOK 100 = USD 100/10.30

USD 0.62 = NZD 1

Therefore, USD 1= NZD 1/0.62

And USD 100/10.30 = NZD 100/10.30 x 1/0.62

So NOK 100 = NZD 15.6593  

2. USD1 = HKD 7.75

Therefore, USD 1/7.75 = HKD 1

And USD 100/7.75 = HKD 100

USD1 = NOK 10.30

Therefore USD 100/7.75 = NOK 10.30 x 100/7.75

So, USD 100/7.75 = NOK 132.9032

Which means HKD 100 = NOK 132.9032

So it will take NOK 132.9032 to buy HKD 100

3. We are given

• One ounce of gold costs $1700 US.
• One ounce of gold also costs 2,000,000 Korean Won (KRW).

So arbitrage profit can be achived by following the below steps:

1. Buy one ounce of gold for KRW 2,000,000
2. Sell gold for USD 1700
3. Conver USD to KRW, if USD 1 = KRW 1210, then USD 1700 will convert to 1700 x 1210 = KRW 2057000
4. So the arbitrage profit is 2057000-2000000 = KRW 57000