AU.S. wine merchant travelling in France has found a French wine of the same
quality as a U.S. wine they regularly sell. She assumes that the real exchange
rate should be 1 case of U.S. wine equals one case of French wine. The French
wine merchant will sell her a case of the French wine for 350 euros. She knows
that a case of the equivalent U.S. wine sells for $400. The euro is selling in
France for $1.20.
Assuming transportation costs are $40 per case of either wine, which of the
following statements is true?
A. The U.S. wine merchant should buy the U.S. wine and sell it in France and make a profit.
B. The U.S., wine merchant should buy the French wine and sell it in the U.S. and make a profit.
C. There is no profit in the deal.
D. None of the above
