Suppose that you operate a purely competitive firm that buys and sells foreign c

Question

Suppose that you operate a purely competitive firm that buys and sells foreign currencies. Also suppose that yesterday your business activity consisted of buying 100,000 Swiss francs at the market exchange rate and selling them to U.S. travelers to Switzerland for a 3 percent commission. Go to the Federal Reserve Web site at www.federalreserve.govand select, in order, Economic Research and Data Download Program, and Foreign Exchange Rates. What was your total revenue in dollars yesterday (be sure to include your commission)? Why would your profit for the day be considerably less than this total revenue?

Explanation / Answer

the exchange rate of swiss frank to US dollar is 0.98/$1, i.e. one US dollar is equals to 0.98 swiss frank.

here the people bought 100,000 swiss francs, for it they may spend- 100,000*1.0204= $102,040

the total revenues in dollars= 102,040*1.03= $105,102

when the exchange rate increase the profits will increase and viceversa.

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