Suppose rice in the United States and in Germany is of similar quality. But supp

Question

Suppose rice in the United States and in Germany is of similar quality. But suppose that one pound of rice costs 3 in Germany and $1.6 in the United States. Suppose the actual euro/dollar exchange rate on currency markets is $1.167/. If company A wants to get the benefits (arbitrage opportunity) from a transition of 10,000 pounds rice, if there is no cost in the middle transition process, how much benefit can they get from the arbitrage? O They could get 9,707 dollars They could get 9,707 euro:s O They could get 10,181 dollars O They could get 10,181 euros

Explanation / Answer

As per Purchaing Power Parity,

Price of Rice in Germany * Exch Rate = Price of Rice in US
Euro 3 * $1.167/Euro = Price of Rice should be in US
$ 3.501 = Price of Rice should be in US

But Actual Price = $ 1.6 ( which is actually Cheaper)

So Arbitrage Solution is Buy Rice in US & Sold in Germany

So Gain on per pound of Rice = 3.501 - 1.6
So Gain on per pound of Rice = $1.901
So Gain on 10000 pound of Rice = $19010

Equivalent in Euro = 19010/1.167 = Euro 16,289

So Benefit is either $ 19010 or Euro 16,289
None of the given option is correct

PS:
It Seems the Question drafter had made a mistake while solving, by considering exchange Rate as Euro 1.167 per$ instead of given $ 1.167 per Euro

As in this case

Price of Rice in Germany / Exch Rate = Price of Rice in US

Euro 3 / $1.167/Euro = Price of Rice should be in US
$ 2.5707 = Price of Rice should be in US

But Actual Price = $ 1.6 ( which is actually Cheaper)

So Arbitrage Solution is Buy Rice in US & Sold in Germany

So Gain on per pound of Rice = 2.5707 - 1.6
So Gain on per pound of Rice = $0.9707
So Gain on 10000 pound of Rice = $9707

which will give option as - 9707 Dollars

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