ABSTRACT
There exist so many different models for exchange rate determination, such as the interest parity rules, the purchasing power parity rule, the monetary model, exchange rates as an asset model, etc. However, the central assumption for almost all of them is the same: There cannot be long-lasting arbitrage opportunities in the financial markets. Nevertheless, this central assumption is proven wrong in reality. In fact, the real life data indicates that there exist excess return chances from currency carry trade (an arbitrage trade) at almost any moment in the global exchange rate market and this chance is temporarily lost rarely, only during the break-out of tail events. That is why it is so difficult – if not impossible – to find a reliable and accurate prediction model of exchange rates.
