Re:Amazon Is Seeking $16B Bond Sale for Whole Foods
by aianus on Tuesday August 15, 2017 @11:30PM
(#15024756)
In general the price of a futures contract is that which avoids arbitrage opportunities.
If the interest rate in EUR is 2% and the interest rate in USD is 4% and the cost to maintain a EUR/USD hedge is less than 2% then you can make free risk-free money by borrowing EUR at 2%, exchanging it to USD, and lending it out at 4%.
Such a situation is unstable as more and more capital would pour in to take advantage of it and the cost to hedge would rise or the interest rates would move closer together until the gap disappeared.
If the interest rate in EUR is 2% and the interest rate in USD is 4% and the cost to maintain a EUR/USD hedge is less than 2% then you can make free risk-free money by borrowing EUR at 2%, exchanging it to USD, and lending it out at 4%.
Such a situation is unstable as more and more capital would pour in to take advantage of it and the cost to hedge would rise or the interest rates would move closer together until the gap disappeared.