The article explores the feasibility of hedging a dealer's unbalanced position in a foreign exchange market by arbitrage for previously concluded forward contracts. One technology is “reverse hedging,” which involves opening of missing spot positions to obtain risk free results. In the Russian market, this technology can translate losses of an unbalanced position into gains. The authors discuss factors of market inefficiency and their influence on the results of hedging unbalanced position through the tool of arbitrage in spot foreign exchange and credit markets. Hedging appears to be slightly different for quotes relative to upper or lower boundaries of the arbitrage corridor. Derived formulas allow estimating the financial result for cases of implementing the proposed risk minimization procedure. The authors suggest a new approach to formulating the criterion of expediency of such operations and provide its mathematical formalization based on historical data of exchange volatility and attitude to risk. Refs 15.
Translated title of the contributionEXPEDIENCY OF LOSSES IN ARBITRAGE IN THE FOREIGN EXCHANGE MARKET
Original languageRussian
Pages (from-to)602-621
Journal ВЕСТНИК САНКТ-ПЕТЕРБУРГСКОГО УНИВЕРСИТЕТА. ЭКОНОМИКА
Volume33
Issue number4
StatePublished - Dec 2017

    Scopus subject areas

  • Economics, Econometrics and Finance(all)

ID: 38441502