Question

Explain with examples (at least 3) of arbitrage in exchange rates.

Answer 1

Arbitrage means selling and purchasing of currencies in two or more foreign exchange market .The aim for doing this process simultaneously is form maximising profit by capitalizing the currencies.As we know there is differential value of currency in different market hence the ultimate aim for arbitage in exchange rate is to getting the capital profit by way of investing in different market.this is arises because there is inefficiency of market is exists.hence the price differential is also known as trade net payoff.

Example-

1) Investing in stock of BSE is worth 3500 Rs .while in NSE the same stock price is 3000 Rs. hence there is net gain of 500 Rs in investing in BSE.

2) Investing in stock of london stock exchange worth $ 40 while same stock is available at new york stock exchange at $ 40.80 hence there is gain of $ 0.80 if we invest in new york stock exchange.

3) Investment in Listed cross border securities is also example of arbitage in foreign exchange rate.