Foreign Exchange Graded Assignment | Read Chapter 11 | Back to Assignment Due Fr

Question

Foreign Exchange Graded Assignment | Read Chapter 11 | Back to Assignment Due Friday 12.01.17 at 11:45 PM Attempts: Average: /3 2. Arbitrage and spot exchange rates Aa Aa Suppose you trade dollars and euros for a bank that has branches in New York and Frankfurt. You can electronically transfer the funds between the two branch locations at no cost, and trading commissions are negligible. The current dollar-per-euro exchange rate in New York is Es/EURNY - 1.5775, while in Frankfurt, it is E1.5331 You can make a profit for the bank if you buy euros in Frankfurt and sell them in Frankfurt Other foreign exchange traders will buy euros in Frankfurt and sell them in Frankfurt buy dollars in Frankfurt and sell them in Frankfurt Frankfurt (Es/EUrFR) will rise and the dollar-per-euro exchange rate in New York (E$/EURNY) will They will also . As a result, the dollar-per-euro exchange rate in fall QNA 3.16 © 2004-2016 Aplia. All rights reserved Grade It Now Save & Continue 2013 Cengage Learning except as noted. All rights reserved Continue without saving

Explanation / Answer

You can make a profit in the bank if you Buy euros in Frankfurt and sell them in New York.

Other foreign exchange traders will buy euros in Frankfurt and sell them in New York. They will also buy dollars in New York and sell them in Frankfurt. As a result, the dollar per euro exchange rate in frankfurt will rise and the dollar per euro exchange rate in New York will fall.

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