The exchange rate between any two currencies is kept the same in different monetary centers by ____________.

Question

Quizplus · Accepted Answer

Arbitrage involves taking advantage of differences in the market price of an asset by simultaneously buying and selling it in different markets. In the context of currency exchange rates, arbitrage ensures that the exchange rate between two currencies remains the same in different monetary centers. This is because if the exchange rate in one center is more favorable than in another center, traders can buy the currency in the cheaper center and sell it in the more expensive center, thus equalizing the exchange rate. The other options, effective exchange rate, speculation, and hedging, do not necessarily ensure the same exchange rate in different centers.

The Exchange Rate Between Any Two Currencies Is Kept the Same