For example, the annual interest rate in China is 7%, the annual interest rate in the United States is 10%, and the one-year forward exchange rate in the United States is 4% lower than the spot exchange rate. You can borrow dollars at the interest rate of 10%, convert them into RMB in the foreign exchange market, invest in China, and sell the forward RMB at the same time, and you can get a risk-free net profit of 1%.
The real foreign exchange arbitrage is mostly done by banks, which requires higher professional knowledge and capital. Mainly by means of exchange. That is to say, a spot and a forward business are merged in the same transaction, or a loan business is merged in one business. It does have explosive fluctuations, but the time and price are uncertain.
Extended data
The essence of risk-free arbitrage
At present, several kinds of arbitrage transactions popular in the market are actually carry trades in essence. Risk-free arbitrage is a kind of financial tool, which refers to investing funds in a group of foreign exchange, agreeing on the forward exchange rate, and converting foreign exchange into local currency according to the agreed exchange rate after obtaining the deposit income of foreign exchange, so as to obtain the income higher than the domestic deposit interest rate. In other words, arbitrage is carried out at the same time to lock in the exchange rate.
Because the root of arbitrage lies in the unbalanced pricing of different assets or the same asset in different time and space, the basic principle of the law of supply and demand determines that those who underestimate the value will increase their prices because of large-scale buying, while those who overestimate the value will decrease their prices because of large-scale selling, and finally the two will reach a balance. Of course, this balance is not the same in absolute price, but a relative price that loses arbitrage appeal after considering transaction costs.
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