Canadian Currency
Suppose you go to a local café to order a drink. Instead of paying with the currency used in your home country, imagine you try to pay with the currency of another country. What do you think the response would be at the café? Why? What could you do to convince them to accept foreign currency at a local café? Imagine that you are at the border of two countries, say in a café near the US border with Canada. Do you think you could use Canadian currency in a US café near the border?
2. When you are traveling in a foreign country and want to use your debit card, what type of fees do you pay to withdraw money in foreign currency? Usually fees take two forms: a fixed fee, say $5, for any size transaction or a fee that is proportional to the amount you withdraw. If you want to make a large withdrawal, which type of fee do you prefer? If the fee is fixed, will this create an incentive to make more or fewer withdrawals? What does the fixed fee do to the size of the withdrawal you make?
3. Suppose the dollar price of euros is $10 and the euro price of dollars is EUR 1. Explain how you could make a profit in this market. What would you buy and what would you sell? Can this be an equilibrium in the foreign exchange market? Show that there are no arbitrage profits if the dollar price of the euro is $1.25 and the euro price of the dollar is EUR 0.80.
