If a bottle of fine French wine costs US$250 in the U.S., 2500 rand in South Africa, there are no transaction costs, and the exchange rate is 5 rand/US$, then

Question

Quizplus · Accepted Answer

If we buy the wine in the U.S. for US$250 and sell it in South Africa for 2500 rand, we will receive 12,500 rand (2500 x 5) for each bottle of wine (assuming there are no transaction costs). This is significantly more than the price of 2500 rand that the wine is sold for in South Africa. Therefore, there is an arbitrage opportunity by buying the wine in the U.S. and selling it in South Africa. As a result, the demand for the wine in South Africa will increase, and the price will eventually drop as the market corrects itself.

If a Bottle of Fine French Wine Costs US$250 in the U.S