FX Rates and FX Derivatives

Abstract

In this final chapter we introduce an elaborate framework for modeling foreign exchange rates (FXR), that, although more empirical work in this area is necessary, appears to be capable of capturing many features of the foreign currencies markets. The framework is based on the assumption that FXR market dynamics prevent arbitrage/imbalance between the investment opportunities in two countries/economies, and then by extension, among any number of them. While this principle is not new, we take it to the next level of scope and generality.