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

Swiss-$ exchange rate: 1 Swiss Franc = 1.02$

Thus, to buy 100,000 Swiss Francs, the firm would have paid = 1.02(100,000) = $102,000

Comission = 3%

Thus, sale to US travellers = 102,000 (1.03) = $105,060

Hence, total profit = $105,060 - $102,000 = $3060

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