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Trading the US Dollar in different locations

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Suppose US$1 = €0.7809 in New York and US$1 = €0.7793 in Paris. How can foreign exchange traders profit from these exchange rates? What actions can they take that may result in the same dollar/euro exchange rate in both New York and Paris?

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Solution Summary

The trading of the US dollar in terms of euro and its profits to traders are discussed in a structured manner in this response. The related references are also provided.

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Foreign exchange traders can profit from these exchange rates by buying the USD@ € 0.7793 in Paris and selling it at €0.7809 in New York. This transaction can be profitable for the traders if the transaction cost of the traders is less than € 0.016. This is the difference between the price of US $ in New York and Paris. Another risk is that there is high volatility in the foreign exchange markets and if between the trades the exchange rate changes adversely, the trader may incur a loss. For example, if the trader purchases US dollars at € 0.7793 but when he attempts to sell at New York the price has dropped to € 0.7790 New York. The trader will incur a loss. It is possible to earn from the difference ...

Solution provided by:
Hatim Baxamusa, MBA
Education
  • BSc , University of Calcutta
  • MBA, Eastern Institute for Integrated Learning in Management
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