When exchange rates are not in alignment, traders see opportunities for _____, which move the rates _____ equilibrium.
A) speculation; away from
B) arbitrage; toward
C) investments; away from
D) liquidation; toward

Question

Quizplus · Accepted Answer

When exchange rates are not in alignment, traders see opportunities for arbitrage, which involves buying currency in one market and simultaneously selling it in another market at a higher price. This activity helps to move the exchange rates toward equilibrium. Speculation may also occur, but it is not a guaranteed way to bring exchange rates into alignment. Investments and liquidation do not necessarily involve currency exchange rates.

When Exchange Rates Are Not in Alignment, Traders See Opportunities