Attempts: Average:/3 2. Arbitrage and spot exchange rates Aa Aa Suppose you trad
ID: 1115478 • Letter: A
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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 E$(EURNY = 1.6175, while in Frankfurt, it is Eseura_ 1.5957. You can make a profit for the bank if you buy euros inFrankfurt and sell them inNew York and sell them in New York They will also . As a result, the dollar-per-euro exchange rate in Other foreign exchange traders will buy euros in Frankfurt Frankfurt (EER il fall and the dollar-per-euro exchange rate in New York (Es/EURY) lrise fall riseExplanation / Answer
Suppose you trade dollars and euros for a bank that has branches in New york and Frankfurt. You can electronically tranfer the funds between the two branch locations at no cost, and trading commissions are negligible. The current dollar-per-euro exchange rate in New york is E$/EURNY = 1.6175 , while in Frankfurt , it is E$/EURFR = 1.5957.
So, profit for the bank if you buy euros in Frankfurt, and sell them in New York ,because exchange rate of Dollar per euro is less in Frankfurt compare to New york. And this shows the depreciation of Euro currency in Frankfurt. Therfore, buying Euro in Frankfurt and sell in New York is beneficial.
Other foreign exchange traders will buy euros in Frankfurt and sell them in New York . They will also buy dollars in New York and sell them in Frankfurt, because dollar per euro exchange rate is high in New York compare to Frankfurt. This shows the depreciation of Dollar currency in New York, Therefore,buying dollars in New York and Sell it in Frankfurt will be beneficial.
As a result, the dollar-per -Euro exchange rate in Frankfurt ( E$/EURFR) will rise , and the dollar per euro exchange rate in New york (E$/EURNY) will fall.
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