Final answer:
Arbitrage opportunities arise when discrepancies in exchange rates or interest rates across different markets or countries can be exploited for profit. Examples include locational, triangular, and covered interest arbitrage. Current foreign exchange and interest rates must be examined to identify such possibilities.
Step-by-step explanation:
Arbitrage in the context of foreign exchange markets involves taking advantage of price discrepancies in different markets to make a profit. Locational arbitrage occurs when there is a price difference for the same currency in different locations. Triangular arbitrage is when an opportunity exists to make a profit from the exchange rates discrepancy between three different currencies. Covered interest arbitrage takes advantage of the differences in interest rates between two countries while hedging against exchange rate risk.
Using actual foreign exchange rates and interest rates, an arbitrageur would examine the rates for opportunities. For example, if the interest rates are higher in the United States compared to Mexico, this could attract funds from Mexico as investors seek higher returns in the US. These shifts in demand for currencies due to differing interest rates can affect the value of those currencies on the exchange markets, potentially creating opportunities for arbitrage. However, in a market with many participants and quick adjustments, these opportunities are often fleeting and difficult to exploit.
To illustrate if arbitrage is possible, one would need to access current currency exchange rates and interest rates, then calculate potential profits from discrepancies, considering transaction costs, to determine if any type of arbitrage could be achieved.