a.Canada (dollar), 19802012 Suppose quotes for the dollareuro exchange rate,E$/, are as follows: in New York, $1.50 per euro; and in Tokyo, $1.55 per euro. Describe how investors use arbitrage to take advantage of the difference in exchange rates. Explain how this process will affect the dollar price of the euro in New York and TokyoConsider a Dutch investor with 1,000 euros to place in a bank deposit in either the Netherlands or Great Britain. The (one-year) interest rate on bank deposits is 2% in Britain and 4.04% in the Netherlands. The (one-year) forward europound exchange rate is 1.575 euros per pound and the spot rate is 1.5 euros per pound. Answer the following questions, using theexactequations for UIP and CIP as necessary.
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