The arbitrage of foreign exchange currencies is the strategy of exploiting price discrepancy in the foreign Exchange markets. It may be effected in numerous ways but however it is carried out, the arbitrage seeks to buy currencies and sell currencies that are currently contrary but extremely likely to rapidly congregate. The expectation is that as prices move back towards a mean, the arbitrage becomes more profitable and can be closed, sometimes even in milliseconds. Market participants engaged in arbitrage, collectively, help the market become more efficient. All types of arbitrage rely on unusual circumstances being temporarily extant in the markets. Additionally, all multinational businesses and financial institutions heavily apply the arbitrage in the foreign Exchange market to reap the Ubnormal returns trading mechanism.

a. Analyze how the arbitrage of foreign exchange currencies could help the foreign exchange market to be more efficient.

b. Analyze the market forces that should occur to eliminate any further possibilities arbitrage opportunities.

c. Analyze how the changes in interest rate could affect the exchange rate and how arbitrage could affect the core of the equilibrium state of the relationship between interest rate and exchange rate.