Foreign exchange market and gains from trade

The foreign exchange market trades currencies, and its prices obey no-arbitrage conditions: identical assets cannot sell at different prices once exchange rates are accounted for. Triangular arbitrage checks three currencies for consistency; covered interest arbitrage links spot rates, forward rates and interest differentials. Beyond arbitrage, trade's gains are measured by the terms of trade and the trade multiplier: export growth raises income, which raises imports, and the multiplier shows the total effect. Worked example: if the spot rate is 80 rupees per dollar and the one-year forward rate is 82, the rupee is at a forward discount of (82 - 80)/80 = 2.5%.