What is locational arbitrage?

Locational arbitrage refers to the practice of capitalizing on price discrepancies for the same financial instrument that exist in different markets or locations. Traders can buy the asset in one market where the price is lower and simultaneously sell it in another market where the price is higher, thus profiting from the difference. This practice relies on the principle of market efficiency, which suggests that at any given time, identical goods should have the same price when adjusted for exchange rates; however, if a discrepancy exists, arbitrageurs will act quickly to take advantage of it, leading to corrections in market prices.

The other options focus on different aspects of trading or investment strategies that do not specifically capture the essence of locational arbitrage. Investing in multiple currencies simultaneously may encompass a broader strategy, while buying currencies at theoretical rates relates more to theoretical valuation rather than actual market discrepancies. Trading currencies without intermediaries might imply direct trades, which does not necessarily involve capitalizing on locational price differences. Hence, the correct focus is on the ability to exploit price variances across different locations.