Due to ____, market forces should realign the spot rate of a currency among banks.
A) forward realignment arbitrage
B) triangular arbitrage
C) covered interest arbitrage
D) locational arbitrage

Question

Quizplus · Accepted Answer

Locational arbitrage refers to the process of buying a currency at a lower price in one location and selling it at a higher price in another location in the absence of any exchange rate risk. If market forces lead to a discrepancy in the spot rate of a currency among banks, locational arbitrageurs will step in and buy the currency at the lower rate and sell it at the higher rate until the spot rate is realigned across banks. Therefore, due to locational arbitrage, market forces should realign the spot rate of a currency among banks. The other options (forward realignment arbitrage, triangular arbitrage, and covered interest arbitrage) are different types of arbitrage strategies that may not necessarily lead to the realignment of spot rates among banks.

Due to ____, Market Forces Should Realign the Spot Rate