Question

If 1 euro is priced at $1.25 and if 1 euro will also buy 88 Japanese yen (€1 = ¥88), in equilibrium, with no arbitrage opportunities, how much is the cross rate between the yen and the dollar (yen per dollar exchange rate)?

Answer 1

Answer:

So the exchange rate is that each dollar is worth 70.4 yens.

Step-by-step explanation:

We have that:

1 euro is priced at $1.25

1 euro will also buy 88 Japanese yen

This also means that:

$1.25 is priced at 88 Japanese yen

How much is the cross rate between the yen and the dollar (yen per dollar exchange rate)?

How much yens is 1 dollar?

This can be solved by a simple rule of three.

$1.25 - 88 yen

$1 - x yen

$1.25x = 88$

$x = \frac{88}{1.25}$

$x = 70.4$

So the exchange rate is that each dollar is worth 70.4 yens.