Question: Be able to explain what arbitrage is and how triangular arbitrage works. Also note that we worked problems on the forward premium (discount), profiting from

Be able to explain what arbitrage is and how triangular arbitrage works. Also note that we worked problems on the forward premium (discount), profiting from triangular arbitrage and covered interest parity. What is exchange rate risk? Know the uncovered interest rate parity condition and why a risk premium exists. Hedging and speculating should be a part of your vocabulary. Why would an exporter hedge? (Is a speculator smart or just a risk lover?) How does a speculator make a profit in the exchange markets? What is uncovered interest arbitrage? How does covered interest arbitrage work? Does this mean that profits are always waiting for arbitrageurs to grab up? Why would anyone risk the exchange rate market uncovered? What does this have to do with the efficiency of foreign exchange markets?

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