Answers to End Of Chapter 7 Questions Explain the concept of locational arbitrage and the scenario necessary for it to be plausible.
Locational arbitrage can occur when the spot rate of a given currency varies among locations.
Specifically, the ask rate at one location must be lower than the bid rate at another location. The disparity in rates can occur since information is not always immediately available to all banks. The large demand for New Zealand dollars at Bank Y will force this bank's ask price on New Zealand dollars to increase. The large sales of New Zealand dollars to Bank X will force its bid price down. Once the ask price of Bank Y is no longer less than the bid price of Bank X, locational arbitrage will no longer be beneficial.