Assume you discovered an opportunity for locational arbitrage involving two banks and have taken advantage of it. Because of your and other arbitrageurs' actions, the following adjustments must take place.
A) One bank's ask price will rise and the other bank's bid price will fall.
B) One bank's ask price will fall and the other bank's bid price will rise.
C) One bank's bid/ask spread will widen and the other bank's bid/ask spread will fall.
D) A and C

Question

Quizplus · Accepted Answer

As arbitrageurs buy from the bank with the lower ask price and sell to the bank with the higher bid price, the ask price of the bank with the lower ask price will rise, and the bid price of the bank with the higher bid price will fall. This will narrow the bid/ask spread of the bank with the lower ask price and widen the bid/ask spread of the bank with the higher bid price.

Assume You Discovered an Opportunity for Locational Arbitrage Involving Two