Arbitrage opportunities exist in foreign exchange markets from "summary" of International Money and Finance by Michael Melvin
Arbitrage opportunities arise in foreign exchange markets due to the presence of cross-currency exchange rates. These rates represent the prices at which one currency can be exchanged for another. Discrepancies in these exchange rates across different markets create opportunities for arbitrageurs to profit from the price differentials. Arbitrage in foreign exchange markets involves taking advantage of these price differences by simultaneously buying and selling currencies to make a risk-free profit. For example, an arbitrageur might notice that the exchange rate for the euro to the US dollar is higher in one market compared to another. By buying euros in the market with the lower exchange rate and selling them in the market with the higher exchange rate, the arbitrageur can make a profit from the price differential. The presence of arbitrage opportunities in foreign exchange markets helps to ensure that exchange rates remain relatively consistent across different markets. If there were no arbitrage opportunities, exchange rates could deviate significantly from their fundamental values, leading to market inefficiencies and potential losses for investors. Arbitrageurs play a crucial role in the foreign exchange market by helping to maintain price stability and efficiency. By quickly exploiting any price discrepancies, arbitrageurs help to align exchange rates and prevent the emergence of profitable trading opportunities for other market participants.- Arbitrage opportunities in foreign exchange markets result from discrepancies in cross-currency exchange rates across different markets. Arbitrageurs capitalize on these price differences to make risk-free profits and help maintain price stability in the market. Their actions ensure that exchange rates remain relatively consistent and prevent market inefficiencies from arising.
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