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What Is Arbitrage? Assume That the Dollar Is Quoted $1

question 19

Essay

What is arbitrage? Assume that the dollar is quoted $1 = £0.625 in New York and the pound sterling is quoted as £1 = $1.63 in London.Is there an arbitrage opportunity? If so,what would an astute trader do? What will happen to the quotes as trades are made at current prices?


Definitions:

Public Policy

Principles and standards regarded by the legislature or by courts as being of fundamental concern to the state and the whole of society.

Original Obligor

The original party responsible for repaying a debt or fulfilling an obligation under the terms of a contract.

Creditor Beneficiary

A third party that benefits from a contract made between two other parties because the contract discharges a debt or duty owed to them.

On Credit

The purchase of goods or services with the promise to pay at a future date.

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