Assume the following bid and ask rates of the pound for two banks as shown below: As locational arbitrage occurs:
A) the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will increase.
B) the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will decrease.
C) the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will decrease.
D) the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.

Question

Assume the following bid and ask rates of the pound for two banks as shown below:  As locational arbitrage occurs:
A) the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will increase. 
B) the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will decrease. 
C) the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will decrease. 
D) the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.

Quizplus · Accepted Answer

Locational arbitrage is the process of buying currency at a lower price in one location and selling it in another location where the price is higher, to make a profit. In this scenario, if one bank's bid rate for pounds is lower than the other bank's ask rate, a trader could buy pounds at the lower bid rate and immediately sell them at the higher ask rate of the other bank, making a profit. As a result of this activity, the demand for pounds will increase at Bank A, causing its bid rate to decrease, and the supply of pounds will increase at Bank B, causing its ask rate to increase. Therefore, the correct answer is D.

Assume the Following Bid and Ask Rates of the Pound