University:
McMaster University
Course:
COMMERCE 3FC3 | International Finance
Academic year:

2022
Views:

71

Pages:

2
Author:

Sabrina S.

Chapter 6 The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making certain guaranteed profits is referred to as Arbitrage Order the steps for creating an arbitrage portfolio that has (i) no net investment, as well as (ii) no risk, and that should generate no net cash flow in equilibrium. Borrow $S in the US, which is just enough to buy £1 at the prevailing Spot exchange rate S. Lend £1 in the UK at the UK interest rate. Sell the maturity value of the UK investment forward. Covered interest rate arbitrage opportunities are expected to last for a Short When people's expectations for an exchange rate to go up in the future actually cause it to go up, it's referred to as Self-fulfilling expectations The currency carry trade is based on uncovered interest parity not holding When no profitable arbitrage opportunities exist, the market is said to be in Equilibrium Interest rate parity may not hold because of government capital controls that can include taxes or restrictions on currency transactions. The interest rate will be higher in the US than in the UK when the dollar is at a forward discount to the pound, that is, when the dollar is expected to depreciate against the pound. That an increase in the expected inflation rate in a country should cause a proportionate increase in the interest rate in the country is predicted by the Fisher effect. If (1+i_$) > (1+i_£), then a profitable arbitrage opportunity is to lend in the US and borrow in the UK. All else equal, an increase in the US interest rate will lead to a(n) higher foreign exchange value of the dollar. Which currencies have been popular for funding currency trades? Japanese Yen Swiss Franc Why might interest rate parity not hold? There are transaction costs in buying/selling currency. There are bid-ask spreads in capital markets. That any forward premium or discount is equal to the expected change in the exchange rate between two currencies is predicted by forward expectations parity. Источники и связанный контент