Question: 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

The current spot 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 (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 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 (in terms of yen per dollar) would the law of one price hold ignoring shipping costs?

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a The spot exchange rate is 10943 so an item that costs 5000 in the US should cost 547150 in Japan C... View full answer

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