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Profit Possibilities in Currency Markets: Arbitrage, Hedging, and Speculation
Author(s) -
Ghosh Dilip K.,
Arize Augustine C.
Publication year - 2003
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/1540-6288.00056
Subject(s) - speculation , arbitrage , risk arbitrage , profit (economics) , fixed income arbitrage , transaction cost , economics , financial economics , currency , forward contract , covered interest arbitrage , business , monetary economics , microeconomics , arbitrage pricing theory , interest rate parity , finance , capital asset pricing model , futures contract
This paper reviews and extends the existing literature on covered arbitrage, delineates the conditions for profitable arbitrage with the hedging instruments of forward and options contracts in the foreign exchange markets, and defines the maximum possible profits out of a given market environment. Next, the simple rules on speculation are articulated with and without transaction costs, and then we show how speculation can be covered with options and forwards. Finally, speculation is integrated with arbitrage and hedging, and further compounding of profit possibilities is illustrated.