Scenario: Sam Dearing, Budding International Financier
Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm. Sam is hoping to be offered a full-time position at the firm after he graduates from college, and therefore, Sam knows that he must demonstrate a strong understanding of how exchange rates work.
-Suppose Sam then noticed that the actual euro/dollar exchange rate on currency markets is €1.2/$, and that a kilogram of wheat still costs $1 in the U.S. and €1.5 in France. Sam then knows ________.

Question

Quizplus · Accepted Answer

The price of wheat is $1 in the U.S. and €1.5 in France. Given the exchange rate of €1.2/$, the price of wheat in France is effectively €1.5, which is higher than the $1 price in the U.S. when converted to euros (€1.2).