Assume the following information for a bank quoting on spot exchange rates: Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?
Exchange rate of Singapore dollar in U.S $=$.60
Exchange rate of pound in U.S.$=$1.50
Exchange rate of pound in Singapore dollars=S$2.6
A)The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate
B)The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate
C)The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate
D)The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate

Question

Assume the following information for a bank quoting on spot exchange rates:​ Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?
Exchange rate of Singapore dollar in U.S $=$.60
Exchange rate of pound in U.S.$=$1.50
Exchange rate of pound in Singapore dollars=S$2.6
A)The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate
B)The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate
C)The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate
D)The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate

Quizplus · Accepted Answer

Triangular arbitrage involves buying a currency at a lower rate in one market and selling it for a higher rate in another market, taking advantage of any differences in exchange rates. Based on the given exchange rates, if someone were to buy Singapore dollars with U.S. dollars, then buy British pounds with Singapore dollars, and finally sell the British pounds for U.S. dollars, they would end up with more U.S. dollars than they started with. This would create excess demand for British pounds and Singapore dollars, and excess supply of U.S. dollars, leading to a depreciation of the Singapore dollar against the U.S. dollar and the pound against the Singapore dollar, and an appreciation of the pound against the U.S. dollar. Therefore, the correct answer is B.

Assume the Following Information for a Bank Quoting on Spot