Due to ____, market forces should realign the cross exchange rate between two foreign currencies based on the spot exchange rates of the two currencies against the U.S. dollar.
A) forward realignment arbitrage
B) triangular arbitrage
C) covered interest arbitrage
D) locational arbitrage

Question

Quizplus · Accepted Answer

Triangular arbitrage is a process of taking advantage of exchange rate discrepancies between three currencies in the foreign exchange market to create a riskless profit. Due to the law of one price, the cross-exchange rate between two foreign currencies should be in alignment with the ratio of the spot exchange rates of the two currencies with respect to a third currency, usually the U.S. dollar. If the cross-exchange rate deviates from this equilibrium, market forces should realign it through triangular arbitrage.

Due to ____, Market Forces Should Realign the Cross Exchange