Due to ____, market forces should realign the spot rate of a currency among banks. forward realignment arbitrage triangular arbitrage covered interest arbitrage locational arbitrage
Question
Due to ____, market forces should realign the spot rate of a currency among banks. forward realignment arbitrage triangular arbitrage covered interest arbitrage locational arbitrage
Solution
The answer is locational arbitrage.
Here's the step-by-step explanation:
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Locational arbitrage occurs when a person can buy a good or asset at a lower price in one location and sell it at a higher price in another.
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In the context of currency exchange, if one bank is selling a currency at a lower spot rate than another bank, an investor could buy the currency from the first bank and sell it to the second bank at a higher rate.
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This arbitrage opportunity would continue until the spot rates at the two banks realign, eliminating the opportunity for arbitrage.
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Therefore, locational arbitrage is the process by which market forces should realign the spot rate of a currency among banks.
Similar Questions
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 forward realignment arbitrage triangular arbitrage covered interest arbitrage locational arbitrage
Due to ____, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies. forward realignment arbitrage triangular arbitrage covered interest arbitrage locational arbitrage
The situation in which the difference in interest rates between two currencies is equal to the expected change in the spot rate over the same time period is known as: Question 1 Answer a. the uncovered interest parity. b. the forward-spot reversal. c. the covered interest arbitrage. d. the covered interest parity.
Bank dealers in conversations among themselves use a shorthand notation to quote bid and ask forward prices in terms of forward points. This is convenient because forward points may change faster than spot and forward quotes.traders who are looking for violations of covered interest arbitrage are less interested in the actual spot and forward exchange rates but are interested in the premium or discount differential measured in forward points.both “forward points may remain constant for long periods of time, even if the spot rates change frequently” and “traders who are looking for violations of covered interest arbitrage are less interested in the actual spot and forward exchange rates, but are interested in the premium or discount differential measured
Suppose that the annual interest rate is 2.0 percent in the United States and 4 percent in Germany, that the spot exchange rate is $1.60/€ and that the forward exchange rate, with one-year maturity, is $1.50/€. Assume that an arbitrager can borrow up to $1,000,000 or €625,000. If an astute trader finds an arbitrage, what is the net cash flow in one year?
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