Question

Locational arbitrage is possible when: The bid price for a given currency in two locations is...

Locational arbitrage is possible when:

The bid price for a given currency in two locations is different.

The ask price for a given currency in two locations is different.

The bid price for a given curreny in one location is greater than the ask price in another location.

The ask price for a given currency in one location is greater than the bid price in another location.
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Answer #1

Locational arbitrage is a strategy in which a trader tries to get profit from differences in the exchange rate offered by different banks on the same currency. It is possible only when the bid price for a given currency in one loaction is greater than the ask price in another loaction.

Hence, the correct option is (c)

The concept of Locational arbitrage can be very well understood with the help of the following example:

ABC Bank XYZ Bank
Bid price of New Zealand dollar $0.398 $0.393
Ask price of New Zealand dollar $0.400 $0.395

Here, one can buy New Zealand dollars from XYZ Bnak for $0.395 and sell them to ABC Bank for $0.398 and earn profit

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