Question

Scenario: Sam Dearing, Budding International Financier Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm. Sam is hoping to be offered a full-time position at the firm after he graduates from college, and therefore, Sam knows that he must demonstrate a strong understanding of how exchange rates work. Sam's mentor is excited about the wheat prices in France and the U.S. because he sees an opportunity to buy wheat in the U.S. and sell it in France, which is known as a(n) ________.

Answer 1

Answer:

arbitrage

Explanation:

Arbitrage refers to the practice of buying one product, security, commodity or currency in one country and then selling it in another country where it is worth more in order to make a profit.

Arbitrage exists due to market failures, since currently information is available 24/7 and most commodities should have one price. The law of one price states that the price of identical products or commodities should be the same everywhere in the world. That doesn't mean that goods have the same price everywhere since taxes vary from one country to another, but the price without taxes should be equal.