Economcis

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I need some help on the following question, thanks.

e = euros

Suppose quotes for the dollar-euro exchange rate, E$/e, are as follows: in New York $1.50 per euro, and in
Tokyo $1.55 per euro. Describe how investors use arbitrage to take advantage of the difference in exchange
rates. Explain how this process will affect the dollar price of the euro in New York and Tokyo.

  • Economcis -

    The price in NY is lower than Tokyo. An investor could buy euros in NY, wire the euros to Tokyo, then sell the euros in Tokyo, making a gross profit (before expenses) of $.05 per euro.

    But such an arbitrager is increasing the demand for euros in NY and increasing the supply of euros in Tokyo. What should happen to the price of euros in each of these markets??

  • Economcis -

    as demand increase in NY, price goes up, and as supply increase in Tokyo, price goes down, they eventually will equal?

  • Economcis -

    Ta Da. Yes.

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