Question

f interest rate parity (IRP) exists, then triangular arbitrage will not be possible. A. true. B. false.

Answer 1

Answer:

A. True

Explanation:

Arbitrage refers to a situation wherein a gain is made owing to price discrepancy or unevenness in two markets. The rule for arbitrage is to buy from the markets where price is less and sell in the markets where price is higher.

Triangular arbitrage occurs wherein 3 different currencies are involved and the exchange rates are not uniform i.e a discrepancy exists and interest rate parity does not hold true.

Interest rate parity refers to the concept wherein the disparity between two currency exchange rates is adjusted by the respective interest rates of the two countries. When interest rate parity exists, no arbitrage is possible as markets are fairly priced.