What is the role of arbitrage in the foreign exchange markets?

What will be an ideal response?

Answer: Foreign exchange quotes should be consistent with each other so that the exchange rates in all markets will be the same. If a currency could be purchased for one price in, for example, Paris and sold at a higher price in another market, say New York, then arbitrageurs would buy aggressively in Paris, increasing demand, and sell in New York, increasing supply. The increased buying activity in one market and selling activity in the other would soon eliminate the price differential.