Supposes you trade dollars and euros for a bank that has branches in NewYork and
ID: 1093233 • Letter: S
Question
Supposes you trade dollars and euros for a bank that has branches in NewYork and Frankfurt. You can ellectronically transfer the funds between the teo branch locations at no cost, and trading commissions are negligible. The current dollar per euro exchange rate in NewYork is E$/EUR = 1.5695 , While in Frankfurt , it is E$/EUR=1.627
You can make a profit at the bank if you buy euro in (NewYork or Frankfurt)? and sell them in. (NewYork or Frankfurt).?
Other foreign exchange traders will buy euro 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$/EUR) will..(Rise or FAll)...., and the dollar per euro exchange rate in NewYork (E$/EUR) will...(Rise or FAll)..?
Explanation / Answer
Profit can only be made if a currency is purchased for less and sold for more in the market.
As per the given information, 1$ of currency exchanges for 1.5695 euros in NY and 1.627 euros in Frankfurt.
In other words, 1 euro = $0.637 in NY and $0.615 in Frankfurt.
So, profit can be made by buying euros in Frankfurt and selling euros in New york.
Other foreign exchange traders will buy euro in Frankfurt and sell them in New york. They will also buy dollars in New york and sell them in Frankfurt.
As a result, the dollar per euro exchange rate in Frankfurt (E$/EUR) will fall and the dollar per euro exchange rate in NewYork (E$/EUR) will rise.
(Reason being: demand for dollars will increase in New york, shifting the demand curve to the right, thus increasing the exchange rate).
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