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Homework answers / question archive / 1) A company is working out of Vienna with operations in New York simultaneously calls Citibank in New York City and Barclays in London
1) A company is working out of Vienna with operations in New York simultaneously calls Citibank in New York City and Barclays in London. The banks give the following quotes on the euro simultaneously. (3 marks) Citibank NYC Barclays London $1.2828–297€ $1.2824-25/€ Using $2 million or its euro equivalent, determine whether the corporate treasury could make geographic arbitrage profit with the two different exchange rate quotes.
2.You are given the following information: Quantity of imports Foreign currency price of imports Exchange rate (d/f) 20 1.50 Calculate the foreign currency and domestic currency values of imports. What will happen if the exchange rate falls to 1.20, assuming that the value of the elasticity of demand for imports is -0.1? (2.5 marks)
1.Buy 1 Euro at 1.2825$ from Barclays London
Sell 1 Euro at 1.2828$ to Citibank NYC
Thus there is geographic arbitrage profit
Using 2 million dollars buy euros =2*10^6/1.2825=1559454.191 euros from Barclays
Sell euros and get =2*10^6/1.2825*1.2828 dollars =2000467.836 dollars from Citibank NYC
Arbitrage Profit=2000467.836-2000000=467.836 dollars
2.
Solution:
Quantity of imports = 400
Foreign currency Price = 20
Value of import in foreign currency = Quantity * Price = 400 *20 = 8000
Exchange rate = 1.50
Domestic currency price = Foreign currency price * Exchange rate = 20 *1.5 = 30
Value of import in foreign currency = Quantity * Price = 400 *30 = 12,000
Now when exchange rate falls to 1.20 then the quantity demanded will change
Change in price = Final price - Initial price = 1.2 *20 -1.5 *20 = -60
P = 1.5 *20 = 30
please see the attached file.for complete solution.
