Efficient markets hypothesis in the forex markets
What a silly thing to check for. Of course there is no free lunch, no easy arbitrage opportunities in any markets - leave alone the largely electronic forex ones. But I built this 'model' as part of my Exec MBA, thought I will put it up here as a display of my modeling prowess!
Arbitrage opportunities in the forex markets
By Mukul Pareek
The forex markets have tens of currency-pairs. In an efficient market, all currency pairs should move in tandem as to leave no opportunity for making money for free.
But given a set of market exchange rates, might it be possible to say, trade Dollars for Yen, then sell these Yen & buy the Swiss Franc, then convert the Swiss Franc into the Euro, and buy back more dollars using the Euros than were spent in the first Dollar-Yen trade? If we could do that, I would probably be richer than Bill Gates in no time, and you won't need to ever reading the boring stuff you are reading right now.
What the model I built does two things:
1. Goes to the Bloomberg website and fetches the current exchange rates using an Excel web-query, and
2. Runs through various possibilities of currency round-trips to determine a profit opportunity.
Well, I built this model a while back and Bloomberg changed their website, so part 1 does not work very well (though it shouldn't take more than 30 minutes to fix that). Part 2 - where the crux of the model lies, still does work and you should be able to see that.
The model won't probably make sense unless you first read the writeup which can be downloaded from this link in pdf format.
The Excel model is here.
I tried very hard to use Excel's solver add-on - but the profit function for this problem is seriously discontinous and solver fails. If you know a way to solve this using solver, I will really be grateful to know about it because I spent days and days trying to model this problem in a solver-friendly way (please don't send me ideas, send me a working model)
Enjoy!
Here is a screenshot of the model:
Arbitrage opportunities in the forex markets
By Mukul Pareek
The forex markets have tens of currency-pairs. In an efficient market, all currency pairs should move in tandem as to leave no opportunity for making money for free.
But given a set of market exchange rates, might it be possible to say, trade Dollars for Yen, then sell these Yen & buy the Swiss Franc, then convert the Swiss Franc into the Euro, and buy back more dollars using the Euros than were spent in the first Dollar-Yen trade? If we could do that, I would probably be richer than Bill Gates in no time, and you won't need to ever reading the boring stuff you are reading right now.
What the model I built does two things:
1. Goes to the Bloomberg website and fetches the current exchange rates using an Excel web-query, and
2. Runs through various possibilities of currency round-trips to determine a profit opportunity.
Well, I built this model a while back and Bloomberg changed their website, so part 1 does not work very well (though it shouldn't take more than 30 minutes to fix that). Part 2 - where the crux of the model lies, still does work and you should be able to see that.
The model won't probably make sense unless you first read the writeup which can be downloaded from this link in pdf format.
The Excel model is here.
I tried very hard to use Excel's solver add-on - but the profit function for this problem is seriously discontinous and solver fails. If you know a way to solve this using solver, I will really be grateful to know about it because I spent days and days trying to model this problem in a solver-friendly way (please don't send me ideas, send me a working model)
Enjoy!
Here is a screenshot of the model:
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