Non-reversed trades: Further implications for currency trading (original) (raw)
Related papers
International Review of Economics & Finance, 2000
In markets populated by speculators, arbitrageurs and hedgers, it is shown that the conditions for non-reversed trading, which potentially combine investing (borrowing) with hedging must exist. Hence, forward exchange rates always contain an implicit risk premium. Non-reversed trading activity is necessary but not sufficient for all the other classes of trades to exist. If non-reversed traders are active and set arbitrage boundaries, no other type of riskless and profitable one-way arbitrage activity can exist. However, the activities of non-reversed traders cannot preclude rational pure forward speculative activity in the foreign exchange markets.
Risk averse speculation in the forward foreign exchange market
1983
In this paper we study the determination of forward foreign exchange rates. An exchange rate is the price of one currency in terms of another currency, and a forward rate is a contractual exchange rate established at a point in time for a transaction that will take place at the maturity date on the contract in the future. Well-organized forward markets exist for all major currencies of the world for various maturities, with the most active contract lengths being one, three, six, and twelve months.
In this paper we study the determination of forward foreign exchange rates. An exchange rate is the price of one currency in terms of another currency, and a forward rate is a contractual exchange rate established at a point in time for a transaction that will take place at the maturity date on the contract in the future. Well-organized forward markets exist for all major currencies of the world for various maturities, with the most active contract lengths being one, three, six, and twelve months.
In this paper we study the determination of forward foreign exchange rates. An exchange rate is the price of one currency in terms of another currency, and a forward rate is a contractual exchange rate established at a point in time for a transaction that will take place at the maturity date on the contract in the future. Well-organized forward markets exist for all major currencies of the world for various maturities, with the most active contract lengths being one, three, six, and twelve months.
An investigation of risk and return in forward foreign exchange
Journal of International Money and Finance, 1984
This paper examines the determination of risk premiums in foreign exchange markets. The statistical model is based on a theoretical model of asset pricing, which leads to severe cross-equation constraints. Statistical tests lead to a rejection of these constraints. We examine the robustness of these tests to time variation in parameters and to the presence of heteroskedasticity. We find that there is evidence for heteroskedasticity and that the conditional expectation of the risk premium is a nonlinear function of the forward premium. Accounting for this nonlinearity, the specification appears to be time invariant. Out of sample portfolio speculation is profitable but risky.
Arbitrage in the foreign exchange market: Turning on the microscope
Journal of International Economics, 2008
This paper provides real-time evidence on the frequency, size, duration and economic significance of arbitrage opportunities in the foreign exchange market. We investigate deviations from the covered interest rate parity (CIP) condition using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency. The analysis unveils that: i) short-lived violations of CIP arise; ii) the size of CIP violations can be economically significant; iii) their duration is, on average, high enough to allow agents to exploit them, but low enough to explain why such opportunities have gone undetected in much previous research using data at lower frequency.
Non-reversed trade and equilibrium in forward exchange markets
The Quarterly Review of Economics and Finance, 2001
Theoretically, nonreversed trades permit the smallest possible deviation of forward quotes from their equilibrium values. Nevertheless, the observed magnitude of deviations from equilibrium, increases with the time to maturity of the forward contract. Further analysis of forward quotes indicates that successive differences in forward bid and ask rates exhibit strong reversion towards their equilibrium levels, as specified by the nonreversed trading boundaries. Nonreversed trades have lower frequencies of attaining equilibrium than other trades that have been previously studied. The sure existence of quasi-arbitrage trading opportunities is confirmed empirically.
The profitability of forward currency speculation by central banks
European Economic Review, 1986
A methodology is proposed to convert stock data on a central bank's offcial forward position in the foreign exchange market into 'flow data regarding its purchases and sates of forward exchange over time. The flow data enable us to determine whether the central bank's forward currency operations have been profitable or not. The methodology is applied to the forward currency operations of the Bank of Canada. We find that on the whole the Bank of Canada did not make systematic profits or losses on its operations.