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

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

Quizplus · Accepted Answer

Triangular arbitrage involves exploiting the inconsistencies between the exchange rates of three different currencies. In this case, if the cross exchange rate is not in alignment with the spot exchange rates of the two currencies against the U.S. dollar, traders will engage in triangular arbitrage to buy and sell the currencies in a way that will force the cross exchange rate to realign with market forces.

Due to ____, Market Forces Should Realign the Cross Exchange