Spot exchange rate be according to the law of one price

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Reference no: EM13971145

The price of silver in the U.K. is £12.00/oz. The price of silver in the U.S. is $18.00/oz. a. What should the $/£ spot exchange rate be according to the Law of One Price (LOP)? b. If the actual ex-rate is $1.5125/£, and the silver prices in each country stay the same, calculate and report the price of an ounce of silver in both countries, expressed in one common currency (either pound or dollars). Then explain in words how you could make arbitrage profits. c. For an arbitrage trade with 100,000 ounces of silver, calculate and report your arbitrage profits, showing each separate transaction, starting with the purchase of 100,000 ounces of silver in one country and explaining each transaction in words. Express the profit in both dollars and pounds. d. Based on part b (S = $1.5125/£), explain in an essay what would happen to silver prices in each country (up or down?) and explain exactly why the prices would change (what specific market forces are at work?), and explain what would happen to the dollar, the pound, and the spot rate S($/£), and explain why they would all change to restore the LOP. Answer in full sentences.

Reference no: EM13971145

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