The current spot exchange rate is ¥109.43/$. A particular commodity sells for $5,000 in the United States and ¥600,000 in Japan.
a. Does the law of one price hold? If not, explain how to profit through arbitrage.
b. If it costs ¥60,000 to transport the commodity from the United States to Japan, is there still an arbitrage opportunity? At what exchange rate (in yen per dollar) would buying the commodity in the United States and shipping it to sell in Japan become profitable?
c. Given shipping costs of ¥60,000, at what exchange rate would it be profitable to buy the commodity in Japan and ship it to the United States to sell? Comment on the general lesson from parts (a)–(c).
d. Taking the commodity prices in the United States and Japan as given, at what ex-change rate (in terms of yen per dollar) would the law of one price hold ignoring shipping costs?

  • CreatedMarch 26, 2015
  • Files Included
Post your question