What Effect Does the Process of Arbitrage Have on Currency

question 5

Multiple Choice

What effect does the process of arbitrage have on currency markets?

• A)It interferes with the proper functioning of the currency markets.
• B)It creates unnatural demand for currencies that are the subject of arbitrage transactions.
• C)It makes them function properly and is responsible for the rational pricing of currencies.
• D)It does not affect the currency markets because it involves both purchases and sales of the same currency.

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Definitions:

Multinational Corporations (MNCs)

Companies that operate in multiple countries beyond their home country.

Operations

The day-to-day activities involved in running a business to produce goods or services.

Direct Quote

A quote in foreign exchange markets that specifies the domestic currency price for one unit of a foreign currency.

Political Risk

The risk associated with changes in government policy which may negatively affect domestic and foreign businesses.