Question

Assume that the yen/dollar exchange rate quoted in London at 3:00 p.m. is ×120 = $1, and the New York yen/dollar exchange rate at the same time is ×125 = $1. A dealer makes a profit by buying a currency low and selling it high. The dealer has engaged in a(n):________.

Answer 1

Answer:

This question lacks answers

A. currency swap.

B. arbitrage.

C. backwardation.

D. straddle.

The answer is b.

Explanation:

Arbitrage is a common practice used to gain profits from inefficient markets. Since most financial markets are inefficient by nature, dealers and similar business entities that have an interest in this kind of business practice.

The profit in arbitrage is based on the imbalance in the two prices on each market respectively. The term is mainly used for financial markets and various financial instruments (securities, bonds, currencies).

In the example above, the dealer becomes an arbitrageur by making a profit from the difference in the yen/dollar exchange rate in two markets (NY and London.)