ECONOMICS
FOREIGN CURRENCY MARKETS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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attempt to make profits by outguessing the market.
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make their profits through the spread between bid and offer rates of exchange.
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need foreign exchange in order to buy foreign goods.
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take advantage of the small inconsistencies that develop between markets.
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Detailed explanation-1: -take advantage of the small inconsistencies that develop between markets. need foreign exchange in order to buy foreign goods. make their profits through the spread between bid and offer rates of exchange. attempt to make profits by outguessing the market.
Detailed explanation-2: -Forex arbitrage is the strategy of exploiting price disparity in the forex markets. It may be effected in various ways but however it is carried out, the arbitrage seeks to buy currency prices and sell currency prices that are currently divergent but extremely likely to rapidly converge.
Detailed explanation-3: -Arbitrage opportunities in foreign exchange markets tend to be small and disappear quickly. The value of a currency is determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies.
Detailed explanation-4: -In currency arbitrage, the trader would take one euro, convert that into dollars with Bank A and then back into euros with Bank B. The result is that the trader who started with one euro now has 9/8 euros. The trader has made a 1/8 euro profit if trading fees are not taken into account.
Detailed explanation-5: -Arbitrage trading strategy implies that: large profits are made by undertaking high risk investments. arbitrage opportunities will continue to exist in equilibrium. profits are made by trading low risk investments. profits are made with no risk and no investment.