Molson’s Beer is produced in Canada and sold in many countries. In the province

ID: 1122923 • Letter: M

Question

Molson’s Beer is produced in Canada and sold in many countries. In the province of

Ontario, a six pack of Molson’s beer sells for $12.95 Canadian. Across the border

in Michigan, a six pack of the same beer sells for $6.99 U.S. The current exchange

rate is $0.79 U.S. = $1.00 Canadian. (Make sure to show your work.)

a. How much would it cost in U.S. currency to buy the beer in Ontario?

b. How much would it cost in Canadian currency to buy the beer in Michigan?

c. Is there an arbitrage opportunity? Explain.

d. If there is an arbitrage opportunity, where would you buy and where would

you sell? How much profit could you expect on a six pack?

ANSWER:

A) THE PRICE IN US DOLLARS TO BUY BEER IN ONTARIO IS = EXCHANGE RATE OF 1 CAN DOLLARS IN US DOLLARS * PRICE OF BEER IN CANADAIAN DOLLARS

PRICE = 0.79 * 12.95 = $10.23 US DOLLARS

B) THE COST IN CANADIAN CURRENCY TO BUY BEER IN MICHIGAN = PRICE OF BEER IN US DOLLARS / PRICE OF 1 US DOLLAR IN CANDIAN DOLLARS.

PRICE = 6.99 / 0.79 = $8.84 CAN DOLLARS

C) THE ARBITRAGE OPPORTUNITY EXISTS AS THE PRICE IS CHEAPER IN MICHIGAN AND EXPENSIVE IN ONTARIO.

D) I WOULD BUY FROM MICHIGAN AND SELL IN ONTARIO AS THE PROFIT PER SIX PACK IS $10.23 - $6.99 = $3.24 ( IN US CURRENCY)

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