Listing Category: Economics

Triangular Arbitrage

Triangular arbitrage is nothing more than determining whether an arbitrage opportunity exists amongst three currencies with three exchange rates; the complicating factor is that the exchange rates each have a bid rate and an ask rate. (Note: the arbitrage could, in fact, involve more than three currencies.

Mark-to-Market Value of a Currency Forward Contract

In Level II economics we’re given the formula for the mark-to-market value of a currency forward contract. Similarly, in Level II derivatives we’re given the formula for the value of a currency forward contract. These two formulae look rather different from each other.

Economic Growth Theories (Synopsis)

There are a number of theories that attempt to explain the growth of an economy

Covered Interest Rate Parity (IRP) – Pricing Currency Forwards

Pricing currency forward contracts – determining the appropriate future exchange rate to use – is relatively straightforward; it is based on the risk-free interest rates for the currencies involved, and the no-arbitrage condition (i.e., the forward exchange rate should make arbitrage impossible). Because the elimination of arbitrage means that the forward exchange rate has to compensate for inequality in the risk-free interest rates – it has to restore equality, or parity – and because the parity is ensured (or covered) by the forward contract, the approach in known as covered interest rate parity (covered IRP, or CIRP).