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; | Lecture International finance An analytical approach 3 e Chapter 11 - Imad A. Moosa Chapter 11 International Arbitrage 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 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 11-2 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 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 11-3 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 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 11-4 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 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 11-5 Two-point arbitrage Also known as spatial or locational arbitrage it arises when the following condition is violated S A x y SB x y 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 11-6 Two-point
