Suppose you trade dollars and euros for a bank that has branches in New York and

Question

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_$/EUR^NY = 1.5695, while in Frankfurt, it is E_$/EUR^FR = 1.627. You can make a profit for the bank if you buy euros in and sell them in. Other foreign exchange traders will buy euros in and sell them In. They will also buy dollars in and sell them In. As a result, the dollar-per-euro exchange rate in Frankfurt (E_$/EUR^FR) will, and the dollar-per-euro exchange rate in New York (E_$/EUR^NY) will

Explanation / Answer

1. New York as we can purchase 1 euro at a cost of $ 1.5695 in New York while the same at a cost of $ 1.627 in Frankfurt.

2. Frankfurt

3. New York

4. Frankfurt

5. Frankfurt because buyer get more dollar against euro in Frankfurt.

6. New York

7. decrease

8. increase

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