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Equilibrium Conditions Of Forward Exchange Market Expressed In A Simple Geometric Structure

Author

Listed:
  • JIANGUO CHEN

    (Department of Finance, Banking and Property, Massey University, Palmerston North, New Zealand)

  • LLOYD P. BLENMAN

    (Department of Finance, Belk College of Business, University of North Carolina-Charlotte, Charlotte, NC 28223-0001, USA)

Abstract

The paper focuses on the market equilibrium conditions in forward exchange quotes. By careful analysis of the market arbitrage conditions, market supply and demand, we construct the equilibrium ranges for bid and ask forward quotes separately. We present our analysis in a bid-ask cost structure setting, and directly tie the equilibrium and arbitrage conditions to specific trading strategies. We conclude that in equilibrium there will be no chance for one-way-arbitrage in foreign exchange and securities markets, provided that non-reversed traders are active and set the arbitrage boundaries. The framework we develop in the paper is convenient for academic study and practical use in currency and security markets.

Suggested Citation

  • Jianguo Chen & Lloyd P. Blenman, 2005. "Equilibrium Conditions Of Forward Exchange Market Expressed In A Simple Geometric Structure," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(07), pages 915-932.
    • Handle: RePEc:wsi:ijtafx:v:08:y:2005:i:07:n:s021902490500330x
    DOI: 10.1142/S021902490500330X
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