In earlier chapters we examined the disturbing dynamism of intervals between changes in exchange rates and their effect on imports and exports, of leads and lags, of capital movements and of speculation. Our next task is to investigate the disturbing dynamism of arbitrage. On the face of it the suggestion that arbitrage transactions are liable to divert exchange rates from the level at which imports and exports would balance may appear to be paradoxical. For the essence of arbitrage is that it does not alter supply—demand relationship. Nevertheless it is my contention that exchange arbitrage transactions of every kind — whether space arbitrage, time arbitrage or interest arbitrage — are liable to affect exchange rates and might interfere with their tendency to settle around their trade equilibrium levels.
KeywordsExchange Rate Support Point Forward Rate Spot Rate Foreign Exchange Market
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