Question

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

Answer 1

a) Buy in Frankfurt sell in New york

b) Buy in Frankfurt and sell in New York

c) Buy in New York and sell in Frankfurt

d) Fall and Rise

Step-by-step explanation:

Exchange rate in New York ; E$/EUR^NY = 1.5695. i.e. $1 can be exchanged for 1.5695 euro

Exchange rate in Frankfurt : E$/EUR^FR = 1.627 i.e. $1 can be exchanged for 1.627 euros

a) To make profit

Buy euros in Frankfurt and sell them in New York

b) Other Foreign exchange traders will buy Euros in Frankfurt and sell in New York as well to make gain

c) They will also buy $ in New York and sell them in Frankfurt

d) The Dollar per Euro exchange rate in Frankfurt will Fall and the dollar euro rate in New York will Rise

This is due to the law of demand and supply