Final answer:
Arbitrage is the practice of buying and selling foreign currencies to profit from price differences in different markets by exploiting currency values that are appreciating, also called 'strengthening'. This is achieved through strategic trades within the foreign exchange markets where currencies are constantly appreciating and depreciating against each other.
Step-by-step explanation:
The practice of buying and selling foreign currencies to take advantage of exchange rate price differences in two different markets is known as arbitrage. Arbitrage involves the process of buying a currency in one market where it's cheaper and immediately selling it in another market where it's priced higher. This exploits the appreciating value of one currency over another, also known as 'strengthening', for a profit. It's a strategy used to take advantage of the discrepancies in international price differences.
When participating in foreign exchange markets, investors might engage in arbitrage to capitalize on the floating exchange rates, where the value of a currency can fluctuate rapidly based on market conditions. This can include attempting to predict which currencies will appreciate or depreciate and making trades accordingly. Through this process, investors hope to achieve a gain from the exchange rate variations between the different markets.