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

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.

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).

Forward Exchange Value ( fxv) Vs.

Spot Exchange Value (sxv)

If fxv > sxv: Forward Premium; If fxv < sxv: Forward Discount; If fxv = sxv: Flat (even)

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

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.

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