Assume the following bid and ask rates of the pound for two banks as shown below:

As locational arbitrage occurs:

Question

Assume the following bid and ask rates of the pound for two banks as shown below:

As locational arbitrage occurs:

Quizplus · Accepted Answer

Locational arbitrage refers to the process of taking advantage of price differences of a currency in different locations. In this case, if the bid rate for pounds at Bank A is lower than the ask rate for pounds at Bank B, traders will buy pounds at Bank A and sell them at Bank B, making a profit from the price difference. This increased demand for pounds at Bank A will lead to an increase in the bid rate, while the increased supply of pounds at Bank B will lead to a decrease in the ask rate. Therefore, the bid rate for pounds at Bank A will decrease, and the ask rate for pounds at Bank B will increase. Choice D represents this scenario.

Assume the Following Bid and Ask Rates of the Pound