Suppose you trade dollars and euros for a bank that has branches in Los Angeles 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 Los Angeles is E$/EURLA=1.5818, while in Frankfurt, it is E$/EURFR=1.5503.

You can make a profit for the bank if you buy euros in (Los Angles or Frankfurt) and sell them in (Los Angles or Frankfurt) .

Assuming other foreign exchange traders face the same exchange rates you do, they will buy dollars in (Los Angles or Frankfurt) and sell them in (Los Angles or Frankfurt) . As a result, the dollar-per-euro exchange rate in Frankfurt (E$/EURFR) will (fall or rise) and the dollar-per-euro exchange rate in Los Angeles (E$/EURLA) will (fall or rise).

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1 Since the Euro in Frankfurt is lower than the rate in LA one can make a profit by buying Eu... View the full answer