Ch07 PP 06

# Ch07 PP 06 - Chapter 7 International Arbitrage And Interest...

This preview shows pages 1–7. Sign up to view the full content.

7 - 1 Chapter 7 International Arbitrage And Interest Rate Parity International Arbitrage Arbitrage can be loosely defined as capitalizing on a discrepancy in quoted prices to make a riskless profit. The effect of arbitrage on demand and supply is to cause prices to realign, such that no further risk-free profits can be made.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
7 - 2 As applied to foreign exchange and international money markets, arbitrage takes three common forms: ¤ locational arbitrage ¤ triangular arbitrage ¤ covered interest arbitrage International Arbitrage
7 - 3 Locational arbitrage is possible when a bank’s buying price (bid price) is higher than another bank’s selling price (ask price) for the same currency. Example Bank C Bid Ask Bank D Bid Ask NZ\$ \$.635 \$.640 NZ\$ \$.645 \$.650 Buy NZ\$ from Bank C @ \$.640, and sell it to Bank D @ \$.645. Profit = \$.005/NZ\$. Locational Arbitrage

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
7 - 4 Triangular arbitrage is possible when a cross exchange rate quote differs from the rate calculated from spot rate quotes. Example Bid Ask British pound (£) \$1.60 \$1.61 Malaysian ringgit (MYR) \$.200 \$.202 British pound (£) MYR8.10 MYR8.20 MYR8.10/£ × \$.200/MYR = \$1.62/£ Buy £ @ \$1.61, convert @ MYR8.10/£, then sell MYR @ \$.200. Profit = \$.01/£. Triangular Arbitrage
7 - 5 Value of MYR in \$ MYR Value of £ in MYR When the actual and calculated cross exchange rates differ, triangular arbitrage will force them back into equilibrium. Triangular Arbitrage £ Value of £ in \$ US\$

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Covered interest arbitrage is the process of capitalizing on the interest rate differential between two countries while covering for exchange rate risk. Covered interest arbitrage
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 24

Ch07 PP 06 - Chapter 7 International Arbitrage And Interest...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online