If the direct price of the dollar is DM2.5 in 1990 Frankfurt and transaction costs were .4% of the amount transacted,then the minimum- maximum direct quotes for the DM in New York were:

Question

Quizplus · Accepted Answer

The minimum direct quote is the direct price minus the transaction costs, and the maximum direct quote is the direct price plus the transaction costs. So, the minimum direct quote is DM2.5 - 0.004 * DM2.5 = DM2.49, and the maximum direct quote is DM2.5 + 0.004 * DM2.5 = DM2.51. Converting these to US dollars, we get a minimum direct quote of $0.3984 and a maximum direct quote of $0.4016.

If the Direct Price of the Dollar Is DM2