Jan 23 arbitrage.ppt - Learning objectives 1 The basics of...

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Learning objectives 1. The basics of exchange rates i. Definitions ii. Usage of exchange rates iii. Types of exchange rates iv. Types of changes in exchange rates v. Types of exchange rate transactions vi. Arbitrage with two currencies 2. The foreign exchange markets 3. A model of exchange rate determination: Asset market approach a. Risky arbitrage and uncovered interest parity b. Riskless arbitrage and covered interest parity. 1
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Foreign exchange market participants Tiered market 1. Retail tier : Where you buy the foreign currency. Example: Travelex America ( ) 2. Wholesale market : informal network of hundreds of: i. Commercial banks and other depository institutions. 2
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Foreign exchange market participants (cont.) 2. Wholesale market: ii. Non-bank financial institutions (mutual funds, hedge funds, securities firms, insurance companies, pension funds). iii. Non-financial businesses. iv. Central banks. 3
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Spot Rates and Forward Rates The spot contract happens on the spot.
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