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If differences occur for FX rates between three or more currencies, FX dealers may perform:Group of answer choicestriangular arbitrage.cross arbitrage.speculative arbitrage.locational arbitrage. PreviousNext

Question

If differences occur for FX rates between three or more currencies, FX dealers may perform:Group of answer choicestriangular arbitrage.cross arbitrage.speculative arbitrage.locational arbitrage. PreviousNext

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Solution

The correct answer is triangular arbitrage. This is a strategy that takes advantage of discrepancies between three or more currencies. For example, if Currency A is overvalued against Currency B, and Currency B is overvalued against Currency C, but Currency A is undervalued against Currency C, an opportunity for triangular arbitrage exists. The trader can exchange Currency A for Currency B, Currency B for Currency C, and then Currency C back to Currency A. If done correctly, the trader will end up with more of Currency A than they started with, making a profit.

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