Assume the following information for a bank quoting on spot exchange rates: Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?
A) The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.
B) The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.
C) The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate.
D) The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate.

Question

Assume the following information for a bank quoting on spot exchange rates:  Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?
A) The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate. 
B) The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate. 
C) The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate. 
D) The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate.

Quizplus · Accepted Answer

Triangular arbitrage involves taking advantage of discrepancies in exchange rates between three currencies, and in this case, the information provided indicates that there is a potential for triangular arbitrage. The given information does not directly provide the exchange rates for each currency, but we can assume that the bank's quoted exchange rates are the current spot exchange rates. If someone were to perform triangular arbitrage, they would exchange one currency for another in a circular manner to earn a profit. For example, if someone were to exchange USD for SGD, then SGD for GBP, and finally GBP back to USD, they should end up with more USD than they started with. However, the act of trading will cause demand for certain currencies to increase or decrease, and this will affect the spot exchange rates. Specifically, it should cause the Singapore dollar value in U.S. dollars to depreciate, the pound value in U.S. dollars to appreciate, and the pound value in Singapore dollars to depreciate. Therefore, the best choice is B.

Assume the Following Information for a Bank Quoting on Spot