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2. Locational Arbitrage. Assume the following information: Bid price of New Zealand dollar Ask price of New Zealand dollar Beal Bank Yardley Bank S.401 $.398

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2. Locational Arbitrage. Assume the following information: Bid price of New Zealand dollar Ask price of New Zealand dollar Beal Bank Yardley Bank S.401 $.398 S.404 $.400 Given this information, is locational arbitrage possible? If so, explain the steps involved in locational arbitrage, and compute the profit from this arbitrage if you had $1,000,000 to use. What market forces would occur to eliminate any further possibilities of locational arbitrage? ANSWER: Yes! One could purchase New Zealand dollars at Yardley Bank for $.40 and sell them to Beal Bank for S.401. With $1 million available, 2.5 million New Zealand dollars could be purchased at Yardley Bank. These New Zealand dollars could then be sold to Beal Bank for $1,002,500. thereby generating a profit of $2.500. The large demand for New Zealand dollars at Yardley Bank will force this bank's ask price on New Zealand dollars to increase. The large sales of New Zealand dollars to Beal Bank will force its bid price down. Once the ask price of Yardley Bank is no longer less than the bid price of Beal Bank. locational arbitrage will no longer be beneficial

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