Exchange Arbitrage

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 gt sxv Forward Premium
• If fxv lt 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