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Lecture International finance: An analytical approach (3e): Chapter 11 - Imad A. Moosa

Chapter 11 - International arbitrage. In this chapter, the learning objectives are: To define arbitrage and the no-arbitrage condition; to describe two-point, three-point and multi-point arbitrage in the foreign exchange market; to describe commodity arbitrage; . | Chapter 11 International Arbitrage Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa Objectives To define arbitrage and the no-arbitrage condition To describe two-point, three-point and multi-point arbitrage in the foreign exchange market To describe commodity arbitrage 11- (cont.) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa Objectives (cont.) To describe covered interest arbitrage and show how the no-arbitrage condition can be used to determine the forward exchange rate To describe uncovered arbitrage and introduce the concept of carry trade 11- Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa Definition of arbitrage Arbitrage is generally defined as capitalising on a discrepancy in quoted prices as a result of the violation of an equilibrium (no-arbitrage) condition The arbitrage process restores equilibrium via changes in the supply of and demand for the underlying commodity, asset or currency 11- (cont.) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa Definition of arbitrage (cont.) The importance of arbitrage is that no-arbitrage conditions are used for asset pricing, such that the equilibrium price of a financial asset is the price that is consistent with the underlying no-arbitrage condition 11- Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa Two-point arbitrage Also known as spatial or locational arbitrage, it arises when the following condition is violated: 11- Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a . | Chapter 11 International Arbitrage Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa Objectives To define arbitrage and the no-arbitrage condition To describe two-point, three-point and multi-point arbitrage in the foreign exchange market To describe commodity arbitrage 11- (cont.) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa Objectives (cont.) To describe covered interest arbitrage and show how the no-arbitrage condition can be used to determine the forward exchange rate To describe uncovered arbitrage and introduce the concept of carry trade 11- Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa Definition of arbitrage Arbitrage is generally defined as capitalising on