Describe forward, futures and options foreign currency markets, and discuss how they demonstrate arbitrage problems in international finance.

Forward: A forward foreign currency market is an agreement between two parties to exchange currencies at a future date with a predetermined exchange rate. This contract locks in the exchange rate for each party and eliminates any exposure to fluctuations in the foreign exchange markets until the agreed upon settlement date.

Futures: A futures foreign currency contract is similar to a forward contract, but it is traded on an organized futures exchange. In this type of market, buyers and sellers agree to trade specific amounts of currency at a predetermined price on or before a certain delivery date. Futures contracts can also be used for speculation as well as hedging against losses due to changes in foreign exchange rates.

Options: An option gives one party the right (but not obligation) to buy or sell a specific amount of currency at a set price within an agreed-upon time period. These contracts are useful for managing risk but they do not lock-in prices like forwards and futures contracts.

Arbitrage Problems: Arbitrage opportunities arise when there are discrepancies between different markets that offer similar financial instruments such as currencies where one currency may be overvalued relative to another, creating potential profit-making opportunities by buying low and selling high simultaneously in both markets. However, because these types of transactions require funds denominated in both currencies, arbitrageurs must contend with additional costs associated with converting their funds from one denomination into another which reduces their profits or even negates them entirely if prices move too quickly during the conversion process.