Arbitrage in international foreign exchange market implies 1 Earning profits out of selling and buyi...........

Economic Affairs Balance of Payments

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Arbitrage in international foreign exchange market implies

1. Earning profits out of selling and buying foreign currencies in different nations

2. Mounting speculative attacks on the Central Bank’s reserves

Which of the above is/are correct?

1 only

2 only

Both 1 and 2

None of the above

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Explanation:

Arbitrage is leveraging the price differences of the same product in different markets at the same time. For example, buying and selling any product, financial securities (as bonds) or foreign currencies in different markets/economies.
As globalisation is promoting liberalised cross-border movement of goods and services around the world, arbitrage is prevalent today.To avoid arbitrage the WTO member countries (i.e.) the official countries in the process of globalisation) are under compulsion to chalk out homogenous economic policies—and a level-playing field at the international level is emerging. Statement 2: It is wrong. Even though arbitrage may involve an element of speculation, mounting a large speculative attack is not the domain of people earning from arbitrage.