1. Exchange Arbitrage Exchange arbitrage, the process of buying and selling currencies to make a profit, ensures that rates in different locations are essentially the same, and rates and cross- rates are related and consistent among themselves.

2. Interest Arbitrage The process by which individuals seek to make a profit by taking advantage of differences in short-term interest rates available on comparable assets denominated in different currencies at a given point in time.

3. Forward Foreign Exchange Contract A forward foreign exchange contract is an agreement to exchange one currency for another on some date in the future at a price set now (forward exchange rate).

4. Forward Exchange Value ( fxv) Vs. Spot Exchange Value (sxv) n If fxv > sxv: Forward Premium; n If fxv < sxv: Forward Discount; n If fxv = sxv: Flat (even)

5. In the following examples, is the dollar selling at a premium or discount? n e S : $/£ = 1.77 e F :$/£ = 1.78 n $/¥ = 0.004$/¥ = 0.005 n $/DM = 0.40DM/$ = 2.50 n FF/$ = 6.06$/FF = 0.15 n $/SF = 0.51SF/$ = 1.94

6. Interest Arbitrage The process by which individuals seek to make a profit by taking advantage of differences in short-term interest rates available on comparable assets denominated in different currencies at a given point in time.

7. Covered Interest Parity Condition The forward exchange value of a currency tends to exceed its spot value by the same percentage as its interest rates are lower than foreign interest rates. ( i U. S. - i U. K. ) = ( e F - e S ) / e S