4. Arbitrage and spot exchange rates Suppose you trade dollars and euros for a bank that has branches in New York and Frankfurt. You can electronically transfer the funds between the two branch locations at no cost, and trading commissions are negligible. The current dollar-per-euro exchange rate in New York is / EUR 1.5818, while in Frankfurt, it is ES/EUR You can make a profit for the bank if you buy euros in 1.5503. v and sell them in Assuming other foreign exchange traders face the same exchange rates nu do, they will buy dollars in v and sell them in v . As a result, the dollar-per-euro exchange rate in Frankfurt /A,TR ) will v , and the dollar-per-euro exchange rate in New York (ES/EUR ) will