Question : What is the term used to describe the practice of buying and selling currencies to profit from differences in exchange rates across different markets?

Option 1: Currency pegging
 

Option 2: Currency hedging
 

Option 3: Currency arbitrage

 

Option 4: Currency speculation

Correct Answer: Currency arbitrage

Solution : The correct answer is c) Currency arbitrage

The term used to describe the practice of buying and selling currencies to profit from differences in exchange rates across different markets is currency arbitrage. Currency arbitrage involves taking advantage of price discrepancies between different currency markets to make profits.

In currency arbitrage, traders or investors identify situations where there is a difference in exchange rates between two or more markets for the same currency pair. They then exploit this difference by simultaneously buying the currency at the lower exchange rate and selling it at the higher exchange rate, thereby making a profit from the exchange rate discrepancy.

Currency arbitrage is typically a short-term strategy that requires quick execution and efficient access to multiple currency markets. It is based on the principle of capitalizing on temporary market inefficiencies and ensuring that exchange rates align across markets. Arbitrage opportunities are usually short-lived as market forces quickly act to correct any pricing discrepancies.

Currency speculation, on the other hand, involves buying and selling currencies with the expectation of profiting from exchange rate fluctuations. While currency speculation can involve analyzing market factors and taking positions based on future exchange rate movements, currency arbitrage is focused on exploiting immediate price differentials in different currency markets.