Question

If the rate on the London exchange was $1 = .66562 Euro and the rate on the Tokyo exchange was $1 = .66564, a trader could make money using a process called ___________?

Answer 1

A trader can make money from the difference in currency exchange rates between the London and Tokyo exchanges using a process called arbitrage, which involves simultaneous purchase and sale to exploit price discrepancies across different markets.

Step-by-step explanation:

If the rate on the London exchange was $1 = .66562 Euro and the rate on the Tokyo exchange was $1 = .66564, a trader could make money using a process called arbitrage.

Arbitrage is the simultaneous purchase and sale of an asset to profit from a difference in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms. Business people, such as portfolio investors, often utilize arbitrage when they anticipate changes in exchange rates to secure a profit from discrepancies found in currency exchange rates across different markets.

For instance, in the scenario provided, if a trader buys dollars on the London exchange at a rate of .66562 Euro for $1, and then sells those dollars on the Tokyo exchange at .66564 Euro for $1, they would make a small profit from the difference in exchange rates. This kind of profit is usually realized by trading large amounts, as the profit per unit is minimal.