The Yen/dollar Exchange Rate Is ×120 = $1 in London
The yen/dollar exchange rate is ×120 = $1 in London and ×123 = $1 in New York at the same time.What is the net profit if a dealer takes $1,000,000 to purchase ×123,000,000 in New York and engages in arbitrage by selling it in London?
Assume that the exchange rate between the British pound and the U.S.dollar is 1 pound = 2 dollars.An Armani jacket sells for $80 in New York and 40 pounds in London.This is an example of
D)exchange rate risk.
E)the law of one price.
Which of the following is true of the differences in relative demand and supply of currencies?
A)They cannot be used to explain the determination of exchange rates.
B)While they provide an understanding of the major factors underlying exchange rates,they exclude minor factors.
C)They provide a high-level understanding of exchange rates.
D)While they provide an accurate explanation for appreciation of currencies,they fail to explain depreciation.
E)They cannot explain or predict when the demand of a particular currency would exceed its supply and vice versa.
The law of one price states that
A)by comparing the prices of identical products in different currencies,it would be possible to determine the "real" or PPP exchange rate that would exist if markets were efficient.
B)a country's "nominal" interest rate (i)is the sum of the required "real" rate of interest (r)and the expected rate of inflation over the period for which the funds are to be lent (I).
C)a country in which price inflation is running wild should expect to see its currency depreciate against that of countries in which inflation rates are lower.
D)when the growth in a country's money supply is faster than the growth in its output,price inflation is fueled.
E)in competitive markets free of transportation costs and trade barriers,identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.