If the current exchange rate is Rs. 80 to a pound and investors believe that the pound is going to appreciate by the end of the month and will be worth Rs.85, investors think if they gave the dealer Rs. 80,000 and bought 1000 pounds, at the end of the month, they would be able to exchange the pounds for Rs. 85,000, thus making a profit of .......
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Rs. 5,000
Given:
Present exchange rate = Rs. 80 per pound
Expected rate at the end of the month = Rs. 85 per pound
Pounds bought = 1000
The profit is what the pounds sell for at the end of the month minus what they cost now:
Cost now = 1000 × Rs. 80 = Rs. 80,000
Value at the end of the month = 1000 × Rs. 85 = Rs. 85,000
Profit = 85,000 − 80,000 = Rs. 5,000
This hope of gain raises the demand for pounds today, so the rupee-pound exchange rate rises at once.
Note: This question is the example on speculation in the chapter ‘Open Economy Macroeconomics’ of the NCERT book, with the same rates and the same profit of Rs. 5,000.
NCERT (2026-27): “Speculation Money in any country is an asset. If Indians believe that British pound is going to increase in value relative to the rupee, they will want to hold pounds. Thus exchange rates also get affected when people hold foreign exchange on the expectation that they can make gains from the appreciation of the currency. This expectation in turn can actually affect the exchange rate in the following way. If the current exchange rate is Rs. 80 to a pound and investors believe that the pound is going to appreciate by the end of the month and will be worth Rs.85, investors think if they gave the dealer Rs. 80,000 and bought 1000 pounds, at the end of the month, they would be able to exchange the pounds for Rs. 85,000, thus making a profit of Rs. 5,000. This expectation would increase the demand for pounds and cause the rupee-pound exchange rate to increase in the present, making the beliefs self-fulfilling.” |