Sometimes companies deal in foreign exchange to make a profit, even though the transaction is not connected to any other business purpose, such as trade flows or investment flows. Usually, however, this type of foreign exchange activities is more likely to be persuaded by foreign exchange traders and investors. One type of profit  seeking activity is arbitrage, which is the purchase of foreign currency on one market for immediate resale on another market (in a different country) in order to profit from a price discrepancy.  Hence, arbitrage may be defined as an operation that consists in deriving a profit without risk from a differential existing between different quoted rates. It may result from two currencies (also known as geographical arbitrage) or from three currencies (also known as triangular arbitrage).

Interest arbitrage involves investing in foreign-bearing instruments in foreign exchange in an effort to earn a profit due to interest rates differentials. For example, a trader may invest $ 1000 in the United States for ninety days or convert $1000 into British pounds, invest the money in the United Kingdom for ninety days and then convert the pounds back into dollars. The investor would try to pick the alternative that would be the highest yielding at the end of ninety days.

ButSpeculationis the buying or the selling of the commodity i.e. foreign currency, where the activity contains both the element of risk and the chances of a greater profit. Speculators are important in the foreign exchange market because they spot trends and try to take advantage of them. Thus they can be a valuable source of both supply and demand for a currency. As a protection against risk, foreign exchange transactions can be used to hedge against a potential loss due to an exchange rate change.

: Though one hears the term market rate, it is not true that all banks will have identical quotes for a given pair of currencies at a given point of time. The rates will be close to each other but it may be possible for a corporate customer to save some money by shopping around.

: The arbitrage transaction that involve buying a currency in one market and selling it at a higher price in another market is called

. Foreign exchange markets quickly eliminate two point arbitrage opportunities if and when they arise.

refers to the kind of transaction where one starts with currency A, sell it for B, sell B for C and finally sell C back for A ending up with more A than one began with. Efficient foreign exchange markets do not permit risk less arbitrage profit of this kind.

Exchange Rate Factors Factors Affecting Exchange Rates

Different Types of Transactions in the Foreign Exchange Market

Types of Selling Rates in Foreign Exchange Markets

Exchange Rate Regimes: International Gold Standard (1875- 1914)

Your email address will not be published.Required fields are marked*

This site uses Akismet to reduce spam.Learn how your comment data is processed.

Exchange Rate Factors Factors Affecting Exchange Rates

Different Types of Transactions in the Foreign Exchange Market

Types of Selling Rates in Foreign Exchange Markets

Case Study: Nick Leeson and the Collapse of Barings Bank

The Importance of Core Competencies in Strategy Formulation

What is Succession Planning? Definition, Need and Process

Influence of Work-Life Balance Practices on Employees Retention

Work-Life Balance Programs Cost or Investment?

Work-Life Balance Definition, Significance and Importance

Business Environment Concept Meaning, Definition, Features and Importance

Financial System Meaning, Functions and Services

Meaning of Sampling and Steps in Sampling Process

Human Resource Planning (HRP) Meaning, Definition, Features, Purpose, Need, Significance and Objectives

Strategic issues in Not-for-Profit (NFP) organizations

The Engel Kollat Blackwell Model of Consumer Behavior

onElton Mayos Hawthorne Experiment and Its Contributions to Management

onInternal and External Factors Influencing Recruitment

onMeaning of Sampling and Steps in Sampling Process

onRole and Functions of Reserve Bank of India (RBI)

onMotivation Definition, Process, Types, Features and Importance

onElton Mayos Hawthorne Experiment and Its Contributions to Management