The euro/dollar exchange rate is €1 = $1.20. If a trader buys a camera that reta

Question

The euro/dollar exchange rate is €1 = $1.20. If a trader buys a camera that retails for $300 in New York and sells it for €200 in Berlin (ignoring transaction costs, transportation costs, or trade barriers), this represents a potential profit (arbitrage) of _____.

A. $60

B. $80

C. $20

D. $100

#21. If interest rates in the US are 3% and rates in Mexico are 5%, what should happen to the Forward Exchange rate if the current Spot Exchange Rate is MXN13.5/$ in one year? Which currency would weaken?

What would you do if the 1 year Forward Rate quoted today did not reflect the answer you calculated in #21 above?

Explain the concept of economic exposure. How is it different from transaction exposure?

Explanation / Answer

Cost in berlin =200*1.2=240

cost in US=300

PROFIT=300-240=$60

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