Suppose that the GBP is pegged to gold at 20 per ounce. The USD is pegged to gold at $35 per ounce. This implies an exchange rate of $1.75/1. How might an investor take advantage of situation if the current market exchange rate is $1.60/1?

Multiple Choice

• Neither option since it is not possible earn an arbitrage profit.

• Buy pounds at the current rate of $1.60/1. Buy gold at 20 per ounce. Convert the gold to dollars at $35 per ounce.

• Buy gold at $35 per ounce. Convert the gold to 200 at 20 per ounce. Exchange the 200 for dollars at the current rate of $1.60 per pound.

• The investor is indifferent between the two investment strategies since they yield the same arbitrage profit.