INTERNATIONAL ARBITRAGE
At the end of this topic the learner should be able to describe:
a) The concept of international Arbitrage
b) The various forms international arbitrage takes
-International arbitrage is the process of capitalizing on the discrepancy between quoted prices in
the international arena
-Discrepancy in quoted prices is more profound because of different parameters in the economy.
-In the logarithm, arbitrage opportunities usually fade out due to information flow.
-In the international money market, arbitrage takes three forms namely:
Locational arbitrage
Triangular arbitrage
Covered Interest Arbitrage
1. LOCATIONAL ARBITRAGE
This type of arbitrage is based on the geographical location
Investors under this arbitrage form benefit from exchange rate disequilibrium
Commercial banks providing foreign exchange services will normally quote about same prices
on currencies and hence shopping around may not lead to a more favorable rate.
EXAMPLE
Given the case of two banks below:
Bank A Bank B
At the end of this topic the learner should be able to describe:
a) The concept of international Arbitrage
b) The various forms international arbitrage takes
-International arbitrage is the process of capitalizing on the discrepancy between quoted prices in
the international arena
-Discrepancy in quoted prices is more profound because of different parameters in the economy.
-In the logarithm, arbitrage opportunities usually fade out due to information flow.
-In the international money market, arbitrage takes three forms namely:
Locational arbitrage
Triangular arbitrage
Covered Interest Arbitrage
1. LOCATIONAL ARBITRAGE
This type of arbitrage is based on the geographical location
Investors under this arbitrage form benefit from exchange rate disequilibrium
Commercial banks providing foreign exchange services will normally quote about same prices
on currencies and hence shopping around may not lead to a more favorable rate.
EXAMPLE
Given the case of two banks below:
Bank A Bank B
