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Graph Theoretic Approaches to Foreign Exchange Operations

Published online by Cambridge University Press:  06 April 2009

N. Christofides ,
R. D. Hewins  and
G. R. Salkin
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Extract

Trading in currencies in order to obtain the best possible exchange rate is known as arbitrage and can broadly be divided into three categories:

1) Space Arbitrage––transactions to take advantage of discrepancies between rates quoted at the same time in different markets.

2) Time Arbitrage––transactions to take advantage of discrepancies between forward margins for different maturities.

3) Interest Arbitrage––transactions to take advantage of discrepancies between yield on short-term investments in different currencies. This form of arbitrage can be split into (a) Covered and (b) Uncovered (speculative) interest arbitrage. The former variety uses today's forward rate for forward conversion back into our holding currency; the latter allows the dealer to use the spot rate existing in the future.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 14 , Issue 3 , September 1979 , pp. 481 - 500
Copyright
Copyright © School of Business Administration, University of Washington 1979

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References

REFERENCES

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