1 / 7

Exchange Arbitrage

Exchange Arbitrage. Exchange arbitrage, the process of buying and selling currencies to make a profit, ensures that rates in different locations are essentially the same, and rates and cross-rates are related and consistent among themselves. Interest Arbitrage.

omana
Download Presentation

Exchange Arbitrage

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Exchange Arbitrage Exchange arbitrage, the process of buying and selling currencies to make a profit, ensures that rates in different locations are essentially the same, and rates and cross-rates are related and consistent among themselves.

  2. Interest Arbitrage The process by which individuals seek to make a profit by taking advantage of differences in short-term interest rates available on comparable assets denominated in different currencies at a given point in time.

  3. Forward Foreign Exchange Contract A forward foreign exchange contract is an agreement to exchange one currency for another on some date in the future at a price set now (forward exchange rate).

  4. Forward Exchange Value ( fxv) Vs. Spot Exchange Value (sxv) • If fxv > sxv: Forward Premium; • If fxv < sxv: Forward Discount; • If fxv = sxv: Flat (even)

  5. In the following examples, is the dollar selling at a premium or discount? • eS : $/£ = 1.77 eF : $/£ = 1.78 • $/¥ = 0.004 $/¥ = 0.005 • $/DM = 0.40 DM/$ = 2.50 • FF/$ = 6.06 $/FF = 0.15 • $/SF = 0.51 SF/$ = 1.94

  6. Interest Arbitrage The process by which individuals seek to make a profit by taking advantage of differences in short-term interest rates available on comparable assets denominated in different currencies at a given point in time.

  7. Covered Interest Parity Condition The forward exchange value of a currency tends to exceed its spot value by the same percentage as its interest rates are lower than foreign interest rates. ( iU.S.- iU.K.) = ( eF - eS) / eS

More Related