Applications of Futures Reverse Cash and Carry Arbitrage of USD Currency Futures

In this article, we investigate futures reverse cash and carry arbitrage of USD currency futures. Arbitrageurs or rational investors would open a short position to the system of expensive currencies portfolio and simultaneously purchase the same or very similar spot exchange rate portfolio at a spot rate in another market at a lower price to hedge their risks. The effect of this selling by arbitrageurs is to bring the price of the overpriced currencies portfolio down to its fundamental value. The same principle applies for undervalued or depreciated currencies. To earn profit arbitrageurs would buy underpriced currencies and open a short position to an overpriced to hedge their risk. They prevent with this technique underpricing to be substantial or long lasting. We find that the best fit model that helps the arbitrageurs to craft their investment strategy in terms of buying or holding large portfolios of spot exchange rates is the USD currency futures. It has the largest value of the log likelihood and average log likelihood value than the Euro currency futures. In addition, the USD currency futures has the lowest error term value of the Akaike, Schwarz and Hannan - Quinn information criterion