Arbitrage is another common practice in international foreign exchange transactions, and its essence is to make use of the difference between the interest rates of the two countries and the currency swap rates of the two countries to make profits. In foreign exchange business activities, it is quite common for particularly large multinational companies to charge interest through forward transactions. Since the principle of arbitrage is "rate parity", we should first understand "rate parity", but in order to avoid repetition, we only explain its practice here.

Arbitrage activities are divided into "unpaid arbitrage" and "unpaid arbitrage" according to whether to prevent foreign exchange risks.

Length unsecured interest rate arbitrage

The so-called arbitrage mainly uses the interest rate difference between the two markets to transfer short-term funds from the market with lower interest rate to the market with higher interest rate for investment, so as to obtain interest spread income.

For example, if the three-month treasury bill rate in the United States is 8% and the short-term treasury bill rate in the United Kingdom is 10%, if the exchange rate of the pound against the US dollar remains unchanged after three months, investors can transfer the proceeds from the United States to London to buy British Treasury bills after selling US Treasury bills, and they can get 2% spread income. The specific calculation is as follows:

Let's assume that a person has assets of $6,543,800+in new york. If he invests in US Treasury bonds (three-month term), the interest rate is 8%, and the principal and interest are $654.38 +0.08 million. But at this time, if he arbitrage, the profit can be increased. If the spot market exchange rate is-1 =

$2.00, he sold $654.38+00,000 in the spot market and got 500,000 pounds. He transferred 500,000 pounds to London to invest in three-month British government bonds. After three months, he can make a profit of 550,000 pounds [50× (L+ 10%)]. At this time, if the exchange rate of the US dollar against the British pound did not change, then he changed the income of 550,000 pounds invested in London into US dollars, which was 165438+ 10,000 dollars, earning 20,000 dollars more than that without arbitrage trading.

2. Throw and fill arbitrage

Refers to an arbitrageur who transfers funds from place A to place B to obtain higher interest, and at the same time sells the long-term currency of country B in the foreign exchange market to prevent risks.

Take the above example. Instead of investing $6,543.8+00,000 in U.S. Treasury bonds to earn 8% interest income, the arbitrageur sold the dollars in the spot market for pounds, and then transferred the money to London to invest in short-term British government bonds for three months, with an interest rate of 654.38+00%, so that he could get ￡ 550,000 in three months.

At the same time, the arbitrageur immediately signed a contract in the forward foreign exchange market and sold 550,000 pounds in three months to buy dollars. Simply calculate, let's set the exchange rate as1= 2.00 USD, so that after three months, he can earn 165438+ 10,000 USD steadily.

The reason why investors want to sell pounds in the foreign exchange forward market, buy dollars, and transfer pounds to London at the same time is to prevent the dollar from appreciating. As mentioned in the above example, if the arbitrageur doesn't "sell" (that is, he sells at the spot and buys at the forward, and vice versa), then when he gets 550,000 pounds after investing in British three-month government bonds, if the exchange rate between the US dollar and the British pound becomes 1 = .90, then the 550,000 pounds can only be combined into 1045 thousand dollars, and the arbitrageur

Generally speaking, under the floating exchange rate system, it is almost impossible to keep the exchange rate unchanged for three months. Therefore, it is a prudent strategy for arbitrageurs to guard against exchange rate risks and gain interest income while making profits.