At one time the Canadian and US dollars were discounted by 10 cents on each side of the border i.e a Canadian dollar was worth 90 US cents in the US and a US dollar was worth 90 Canadian cents in Canada. A man walks into a bar on the US side of the border,orders 10 US cents worth of beer ,pays with a US dollar and receives a Canadian dollar in change.He then walks aross the border into Canada,orders 10 Canadian cents of beer,pays with a Canadian dollar and receives a US dollar in change.He continues this throughout the day, and ends up with the original dollar in his pocket.Who has paid for the drinks he has consumed?
Got it from the Net the following
ReplyDeleteCharles paid for the beer with the money he (would have)
earned by bopping back an forth across the border.
Suppose that instead of buying beer each time he went into
the pub, he had merely asked for change. Then his US$1 bill
would have got him CAN$1.10, which he could have taken to
the Canadian pub to get US$1.21. After one more round trip,
he would be holding US$1.46. Another round trip would earn
him another US$0.30, giving him US$1.76. But after three
trips poor Charles was holding only US$1.00. The remaining
US$0.76 had been (virtually) spent on beer.
Meanwhile, the US pub had exchanged CAN$3 (worth US$2.70 to
them) and US$0.30 of beer for US$3 (they're even), and the
Canadian pub had exchanged US$3 (worth CAN$2.70 to them) and
CAN$0.30 of beer for CAN$3 (also even). In each case the
$0.30 worth of beer went to Charles, who consumed it.
It's quite clear: Charles paid for the beer with the profits
from his arbitrage.