If the current exchange rate is Rs. 80 to a pound and investors believe that the pound is going to appreciate by the end of the month and will be worth Rs.85, investors think if they gave the dealer Rs. 80,000 and bought 1000 pounds, at the end of the month, they would be able to exchange the pounds for Rs. 85,000, thus making a profit of ......
If the current exchange rate is Rs. 80 to a pound and investors believe that the pound is going to appreciate by the end of the month and will be worth Rs.85, investors think if they gave the dealer Rs. 80,000 and bought 1000 pounds, at the end of the month, they would be able to exchange the pounds for Rs. 85,000, thus making a profit of ......
Solution
Option 1 -> Initial investment: Rs. 80,000. Pounds bought: 1,000. Expected value at month-end: Rs. 85,000. Profit: Rs. 85,000 - Rs. 80,000 = Rs. 5,000.
Option 2 -> This amount is too low and doesn't match the calculation of profit from the exchange rate appreciation.
Option 3 -> This is the total value after exchange, not the profit earned.
Option 4 -> This is the initial investment amount, not the profit.
Hence, Option 1: Rs. 5,000 -> The investors invest Rs. 80,000 at the current rate of Rs. 80/pound to buy 1,000 pounds. When the pound appreciates to Rs. 85/pound by month-end, their 1,000 pounds become worth Rs. 85,000. The profit is the difference between the final value and initial investment: Rs. 85,000 - Rs. 80,000 = Rs. 5,000. This represents a gain from currency appreciation. -> correct
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