BAFI1002 Lecture Notes - Lecture 4: Arbitrage, Spot Contract, Exchange Rate
Document Summary
Voluntarily taking on risk with the expectation of earning a profit. Eg: expecting a currency to appreciate, he will buy the currency. Simultaneously buying and selling an identical commodity in different markets to obtain a risk-free profit. Cross rate can be used to check on opportunities for inter-market arbitrage. Is the process of converting one currency to another, converting it again to a third currency and finally converting it back to the original currency within a short time spam. Riskless profit arises whe(cid:374) the (cid:272)urre(cid:374)(cid:272)(cid:455)"s e(cid:454)(cid:272)ha(cid:374)ge rates do (cid:374)ot e(cid:454)a(cid:272)tl(cid:455) (cid:373)at(cid:272)h up. Go (cid:272)lo(cid:272)kwise to (cid:373)ake (cid:373)o(cid:374)e(cid:455), (cid:271)ut does(cid:374)"t (cid:373)atter where to start. Until the calculated cross rate equals the actual equation, less a margin for. Inter-market arbitrage can continue until exchange rate equilibrium is re-established transaction costs. Exchange rate that does not involve the usd. Sometimes quotes are not available, to calculate these quotes you need to use usd. This chain rule, involves multiplying the two usd exchange rates.
