£ represents the British pound, and ¥ represents the Japanese yen. Suppose [tex]E_{¥/£} = 140[/tex] in London and [tex]E_{¥/£} = 135[/tex] in Tokyo. It is cheaper to buy pounds in , thus arbitrage means you pounds in Tokyo and __ pounds in London.

A. Tokyo, sell, buy
B. Tokyo, buy, sell
C. London, buy, sell
D. London, sell, buy

Question

02-05-2025
Business

High School

We appreciate your visit to represents the British pound and represents the Japanese yen Suppose tex E 140 tex in London and tex E 135 tex in Tokyo It is. This page offers clear insights and highlights the essential aspects of the topic. Our goal is to provide a helpful and engaging learning experience. Explore the content and find the answers you need!

£ represents the British pound, and ¥ represents the Japanese yen. Suppose [tex]E_{¥/£} = 140[/tex] in London and [tex]E_{¥/£} = 135[/tex] in Tokyo. It is cheaper to buy pounds in , thus arbitrage means you pounds in Tokyo and __ pounds in London.

A. Tokyo, sell, buy
B. Tokyo, buy, sell
C. London, buy, sell
D. London, sell, buy

Answer :

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bajajsakshi1995 bajajsakshi1995 · Answer 1 · 2023-09-02T14:51:13-04:00

Final answer:

It is cheaper to buy pound in Tokyo; hence, in an arbitrage opportunity, you would buy pound in Tokyo and sell it in London to take advantage of the higher exchange rate.

Explanation:

The exchange rate between British pound (£) and Japanese yen (¥) differs in London and Tokyo. If the exchange rate in London is E¥/£ = 140, and in Tokyo, it is E¥/£ = 135, it indicates that you can get more yen for your pound in London than in Tokyo, which means it is cheaper to buy pound in Tokyo since it costs fewer yen there. Therefore, in order to make a profit through arbitrage, you should buy pound in Tokyo and then sell pound in London where you will get a higher amount of yen in return.

To illustrate, let's assume you have 135 yen. In Tokyo, you can exchange this for one pound, since E¥/£ is 135. However, in London, this one pound can be exchanged for 140 yen, since E¥/£ is 140, netting you an additional 5 yen profit. This process is also referred to as currency arbitrage.