Realignment in the exchange rates of banks will eliminate locational arbitrage. More specifically, market forces will increase the ask rate of the bank from which the currency was bought to conduct locational arbitrage and will decrease the bid rate of the bank to which the currency was sold to conduct locational arbitrage.

Question

Quizplus · Accepted Answer

This statement is true as realignment in exchange rates will make it less profitable to conduct locational arbitrage, leading to an increase in the ask rate of the bank from which the currency was bought and a decrease in the bid rate of the bank to which the currency was sold. This is because the increased demand for currency from the bank with the lower ask rate and the increased supply of currency to the bank with the higher bid rate will ultimately lead to a convergence of exchange rates.

Realignment in the Exchange Rates of Banks Will Eliminate Locational