Question

American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian rupee (INR); National Bank quotes a bid rate of $0.024 and an ask rate for $0.025. Locational arbitrage would involve:

a. buying rupees from American Bank at the ask rate and selling to National Bank at the bid rate.
b. buying rupees from American Bank at the bid rate and selling them to National Bank at the ask rate.
c. buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate.
d. Locational arbitrage is not possible in this case.
e. buying rupees from National Bank at the bid rate and selling them to American Bank at the ask rate.

Answer 1

Answer:

c. buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate.

Explanation:

• Locational arbitrage is a strategy in which one seeks profits from the difference in exchange rates for the same currency at different banks.
• In our case for locational arbitrage one will have to buy Indian rupee from National bank at the ask rate and then sell them to American bank at the bid rate to make profit.

Answer 2

When an investor attempts to exploit a minor trade rate difference for a particular monetary pair among different banks to gain profit is called locational arbitrage.

The arbitrage would involve:

Option c. Buying rupees from National Bank at the asking rate and selling them to American Bank at the bid rate.

This involvement can be explained as:

• A rate at which the potential purchaser buys an asset by paying a price is called a bid rate.

• In the above-stated case, one will purchase the Indian rupee from one bank at the rate and will make a profit by selling them to American Bank at a bid rate.

Therefore, option C is correct.

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