In which case will locational arbitrage most likely be feasible?
A) One bank's ask price for a currency is greater than another bank's bid price for the currency.
B) One bank's bid price for a currency is greater than another bank's ask price for the currency.
C) One bank's ask price for a currency is less than another bank's ask price for the currency.
D) One bank's bid price for a currency is less than another bank's bid price for the currency.

Question

Quizplus · Accepted Answer

Locational arbitrage involves buying a currency where it is cheapest and selling it where it is most expensive. Thus, if one bank's bid price for a currency is greater than another bank's ask price for the same currency, it implies that the currency is cheaper at one bank, and arbitrageurs can buy from that bank and sell it to the other bank. This will result in a riskless profit as the bid-ask spread will ensure that the trader makes a profit.

In Which Case Will Locational Arbitrage Most Likely Be Feasible