COMMERCE 3FC3 Lecture Notes - Lecture 3: Real Interest Rate, One Unit, Money Supply
19 Oct 2020
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Document Summary
Arbitrage: being able to make a riskless investment. You can do arbitrage on stocks (eg. a stock selling for different prices across stock exchanges) in a few different ways: eg. Shorting a stock on the market where it"s underpriced and selling it in the market where it"s overpriced: however this is very difficult to do in practice, because there are funds set up to specifically track arbitrage. Riskless means no risk exists in this transaction (eg. arbitrage) Identical goods will sell for the same price worldwide: this requires open and liquid markets, the exchange rate is also a component of the rebalancing of the price, same w/ transaction costs. If the prices after exchange are not equal then this activity will continue until an equilibrium is reached. Five parity conditions: purchasing power parity (ppp, the fisher effect (fe, the international fish effect (ife, unbiased forward rate (ufr)
