Non-reversed trades: Further implications for currency trading (original) (raw)

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.