Exam Question - Currency Exchange

Here is a question on currency exchange. This seems to trick a lot of students, so please take the time and solve this.

 

David is going on holiday. On holiday, he sees a nice hotel to stay in. It costs $166 per night. David has brought £1250 with him. The exchange rate is £1 = $1.45.

a)       How many nights can David stay there.

b)      David decides to stay for 4 nights. On his way back to the UK, the exchange rate changes. It is now £1 = $1.25. How much money does he bring back home in pounds? What is the difference between what David brings back, and what he would have brought back if the exchange rate did not change?

 

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ANSWER:

a) It costs $166 per night to stay there. David brings £1250. In dollars, this is £1250 x $1.45 = $1812.50.

1812.50 / 166 = 10.9...  This means David can only stay there for 10 nights - he does not have enough for an 11th night.

b) David stays for 4 nights, so 166 x 4 = $664. This means he has $1148.50 left [$1812.50 - $664].

If the exchange rate did not change, he would have brought back £792.07 [1148.5 / 1.45]. But the exchange rate did change. The dollar got stronger.  Now, £1 can only buy $1.25. Before, £1 could buy $1.45.

So, David has $1148.50 dollars remaining. 1148.5 / 1.25 = £918.80.

David is better off that the dollar got stronger. He is better off by £126.73 [£918.80 - £792.07].