Question

In: Finance

1. Triangular arbitrage. 2. Covered interest arbitrage. 3. The measurement of forecast error. 4. Transaction exposure:...

1. Triangular arbitrage.

2. Covered interest arbitrage.

3. The measurement of forecast error.

4. Transaction exposure: Value at Risk (VaR) method.

5. Commonly used techniques to hedge payables and receivables, including forward/futures hedge, money market hedge, and option hedge.

6. The use of forward contracts to hedge translation exposure

Solutions

Expert Solution

1. Triangular Arbitrage: triangular arbitrage refers to an act of exploiting arbitrage oppertunity due to variation in the prices of three different currency in the foreign exchange market. It is also known as three point arbitrage method.

2. Covered interest arbitrage: Interest rates in two different countries is different. Covered interest arbitrage is a situation where the arbitrage oppertunities in two countries exist that is borrowing at low and investing at high. It exist when interest rate parity theory is not in operation.

3.The measurement of forecast errors: The mean of absolute percent error measure the error innpercentage terms. It is calculated as the weighted average of percentage. The mean absolute deviation measures the error in unit terms.

4. Transaction exposure- value at risk: Value at risk is the measure of risk of loss for investment. It measures how much set of money an investment will lose in the normal market conditions.


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