Zulfiqar Hasan, Associate Professor

This is a Lecture Handout for the course of International Financial Management. The topic is "Foreign Exchange Rates, Quotations and Arbitrage".

Contents of the topic: Foreign Exchange, Foreign Exchange Rates, Types of FX rates, Types of Quotations, Direct Quotations, indirect quotations, American Quotations, European Quotations, Foreign exchange transaction, Arbitrage transaction, Exchange Rates and Export-Import Business.

A foreign exchange transaction is an agreement between a buyer and a seller that a fixed amount of one currency will be delivered for some other currency at a specified rate. Transactions within this market can be executed on a spot, forward, or swap basis.

What is triangular arbitrage? What is a condition that will give rise to a triangular arbitrage opportunity?

Triangular arbitrage is the process of converting one currency to another, converting it again to a third currency and, finally, converting it back to the original currency within a short time span.

Triangular arbitrage is the process of trading out of the First currency into a second currency, then trading it for a third currency, which is in turn traded for first Currency.

The purpose is to earn an arbitrage profit via trading from the second to the third currency when the direct exchange between the two is not in alignment with the cross exchange rate.