Arbitrage with two currencies is NOT possible when:
A) there is an exchange rate difference in two markets.
B) traders are familiar with markets.
C) the exchange rates are in equilibrium, and the same is occurring in all markets.
D) the exchange rates are extremely volatile.

Question

Quizplus · Accepted Answer

Arbitrage, by definition, involves taking advantage of price or exchange rate differences in different markets. When exchange rates are in equilibrium and the same is occurring in all markets, there are no price differences to take advantage of, making arbitrage impossible. Option A is incorrect because exchange rate differences are a prerequisite for arbitrage. Option B is irrelevant, as trader knowledge does not impact the possibility of arbitrage. Option D may create opportunities for arbitrage, but it is not a necessary condition for it to occur.

Arbitrage with Two Currencies Is NOT Possible When