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

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 sold for $8.00 Canadian. Across the border in Buffalo, NY a six-pack of the same beer was for sale for $6.00 US. At the time, the exchange rate was $1.00 US = $1.20 Canadian.

a) How much would it cost in US currency to buy the beer in Ontario?

b) How much would it cost in Canadian currency to buy the beer in Buffalo?

c) Is there an arbitrage opportunity? If yes, explain why arbitrage opportunity exists, and where would you buy and where would you sell?

d) How much profit could you expect on a six-pack?

Explanation / Answer

Ans a)

In Ontario, in Canada $ cost of 6 pack is $ 8 Canadian

Which will be equal to 8/1.2 in US $= $6.67 US

So cost in US currency to buy bear pack of 6 = $ 6.67 US

For one bear bottle cost will be 6.67/6 = 1.11

B) cost in Canadian currency to buy beer in buffalo , pack of six = $ 6* 1.2 Canada = $7.2 Canada

One will cost $1.2 Canada

C) yes arbitrage is possible, pack of six beer can purchased in buffalo for $ 7.2 Canadian and can be sold at $ 8 Canada in Ontario

D) profit of 0.8 $ Canadian can be expected , this is max or in terms of US currency, profit of $ 6.67 US

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