Assume that the bilateral exchange rate between the US dollar and the euro is E$/= 1.20 USD/euro inNew York andE$/= 1.32 USD/euroinFrankfurt.

Answer the following questions

1)How manyEUROSdoes it take to buyONEUS dollar inFrankfurt?

2)How manyEUROSdoes it take to buyONEUS dollar inNew York?

3) Is there an arbitrage opportunity for traders? Explain Why?

4) If there is an arbitrage opportunity in the foreign exchange market explain what strategy do the traders can follow (e.g., buying which currency in what market and selling which currency in what market) to exploit that opportunity? Calculate their profits (returns) for each unit of currency they initially invest to exploit the opportunity (in percent). In addition, explain what will happen to the exchange rates in these two cities once traders implement that strategy (i.e., in which market , New York or Frankfurt, the euro will appreciate and in which it will depreciate)?

5)If the exchange rate isE$/= 1.20,how much will a US$100 dress cost in euros?