EC249 Lecture Notes - Lecture 9: The Foreign Exchange, Forward Rate, Interbank
Document Summary
The foreign exchange (fx) market is an otc market where otc stands for. Is better than the military in terms of speed and efficiency. That a trader can make a riskless profit. Consider the following spot (s(cad/sfr)) and 3 months forward (f90(cad/sfr));s=1. 056. The cad is expected to appreciate vis-a-vis the sfr over the next 3 months. Is the price a dealer is willing to pay you for something. Is the amount the dealer wants you to pay for the same thing. Is the difference between the bid and ask prices. Suppose we observe these banks posting these exchange rates. First calculate the implied cross rates to see if an arbitrage exists. Compare this figure with the barclays figure, buy cheap pounds and trade for expensive dollars buy euros with dollars, buy pounds with euros, buy dollars back with pounds, make more money, therefore the pound is worth less than what.
