Trading Strategy On Foreign Exchange Under Monetary Policy Intervention

Pure arbitrage strategy happens less and less in the market due to electronic traders which instantly seize this opportunity. This type of strategy tends to disappear due to the convergence of price forced by the high frequency traders. But, in some markets this type of arbitrage happens from time to time due to the inefficiency of the market.In this thesis, I will focus on the Foreign Exchange market mostly known as FX market. This market has the particularity to be an over-the-counter(OTC) market. Hence, in this market, I will study the derivatives market focusing on emerging countries currency. Due to the intervention of the states and with the effect of some monetary policy, the derivatives market is inefficient and a pure arbitrage opportunity can happen.In recent years, electronic traders have taken a larger volume in the option market but they are only applicable for the G10 currencies, which have very high liquidities. Some emerging countries do not have such liquidity and monetary stability in order to use this type of computer based pricing and traders have to adjust their models to fit the future uncertainty.