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Topic: Covered interest arbitrage

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	Arbitrage
		Arbitrage is the making of a gain through trading without committing any money and without taking a risk of losing money.
		Equivalently, an arbitrage opportunity exists if it is possible to make a gain that is guaranteed to be at least equal to the risk free rate of return, with a chance of making a greater gain.
		Although arbitrage opportunities do exist in real markets, they are usually very small and quickly eliminated, therefore the no arbitrage assumption is a reasonable one to build financial theory on.
	moneyterms.co.uk /arbitrage (367 words)

	Foreign Exchanges
		Because covered interest arbitrage is essentially riskless (as long as there is no threat of exchange controls or similar government impediments), this arbitrage should drive the covered differential to be essentially zero -- covered interest parity.
		The covered interest differential "in favor of Switzerland" is ((1 + 0.005).(0.505) / 0.500) - (1 + 0.01) = 0.005.
		In testing covered interest parity, all of the interest rates and exchange rates that are needed to calculate the covered interest differential are rates that can be observed in the bond and foreign exchange markets.
	www.wright.edu /~tdung/Forex.htm (5649 words)

	Interest Rate Parity In Times Of Turbulence: The Issue Revisited
		INTEREST RATE PARITY IN TIMES OF TURBULENCE: THE ISSUE REVISITED Nada Boulos and Peggy E. Swanson Abstract Empirical studies on covered interest arbitrage suggest that the interest rate parity condition does not always hold during times of turbulence in the foreign exchange markets, implying market inefficiency.
		Covered interest parity states that the interest differential between two assets which are identical in every respect except for currency of denomination should be equal to the forward premium or discount in the forward foreign exchange market.
		Clinton's study (1988), based on the bounds for deviations from interest parity developed by Deardorff (one-way arbitrage) and Callier (covered arbitrage), defined the maximum limits of deviations from parity that can be explained by transactions costs when foreign exchange costs are swap costs.
	www.studyfinance.com /jfsd/htmlfiles/v7n2/boulos.html (740 words)

	Covered Interest Arbitrage and the Currency Crisis in Korea
		This article closely examines the maintenance of the covered interest parity during the course of the currency crisis in Korea, and analyzes the movement of the covered interest differential(CID) in an effort to draw out some policy implications.
		In the course of the Korean currency crisis, most of the capital outflows took place in the areas of portfolio investment and bank loans, with the ratio of outflow of the latter outweighing that of the former.
		The policy objective of the high interest rate policy was to prevent capital outflows by improving the rates of return at home.
	ideas.repec.org /p/snu/ioerwp/no21.html (389 words)

	International Finance
		Assume the foreign interest rate is higher than the domestic interest rate, for similar instruments.
		Interest arbitrage ensures that the returns on identical investments in two countries will be the same, taking into account expected exchange rate changes:
		The return on the foreign investment is therefore the interest plus the cost of the forward market hedge.
	darkwing.uoregon.edu /~jmellis/480L5.htm (680 words)

	arbitrage - HighBeam Encyclopedia (Site not responding. Last check: 2007-10-15)
		Asymmetric arbitrage and default premiums between the U.S. and Russian financial markets.
		A model of covered interest arbitrage under market segmentation.
		Covered Interest Rate arbitrage in the interwar period and the Keynes-Einzig conjecture.
	www.encyclopedia.com /doc/1E1-x-arbitrag.html (224 words)

	Feasibility of the Tobin Tax
		Theory also suggests that short and medium term exchange rates, to the extent that they deviate from equilibrium rates because of real policy shocks, are determined by interest arbitrage (Dornbusch, 1976), and tend to return to their long term equilibrium rates.
		We are interested in who ends up paying the tax, and who benefits from the resulting reduction in the instability of the exchange rate.
		That is, it may not significantly hinder the ability of financial institutions to deliver foreign exchange market-making services, consisting of arbitrage of interest rates, bid-ask spreads, and maturity structures, to customers.
	www.globalpolicy.org /finance/alternat/schmidt2.htm (5532 words)

	Theory of Interest Rate Parity (IRP)
		The Interest Rate Parity Theorem examines the impact of nominal interest rate differentials between two countries on the forward rate of the foreign currency.
		Recall that in our State 1 example from the Covered Interest Arbitrage Under Varying Forward Rate Regimes table, we had a 0.20 % difference on return to CIA in the approximate method in scenario #4.
		Arbitrage transactions ensure that interest differentials in different segments of the Eurocurrency markets are off-set by corresponding forward premiums or discounts.
	www.bsu.edu /classes/rrathina/course/unit3_5.htm (503 words)

	Arbitrage - Real Time & Delayed Quotes, Charts, News and Data for Futures, Stocks, Commodities and Indexes - ...
		Similarly, arbitrage affects the difference in interests rates paid on government bonds, issued by the various countries, given the expected depreciations in the currencies, relative to each other.
		Then there is of course road arbitrage, or lane arbitrage when drivers and shoppers switch lanes to negotiate through the traffic or through the checkout counters, in order to arrive at their destination sooner or get out of the store sooner than by remaining in the same lane.
		In the 1980s a practice with the oxymoronic name of risk arbitrage became common.
	www.tradesignals.com /glossary/Arbitrage (1418 words)

	Covered Interest Parity Spot tests
		The covered interest parity (CIP) hypothesis asserts that the interest differential between two assets, identical in every respect except currency or denomination, should be zero once allowance is made for the cost of cover in the forward exchange market.
		In order to be able to measure such deviations, therefore, it is important to have data on the appropriate exchange rates and interest rates recorded at the same instant in time and at which a trader could have dealt.
		His analysis concentrates on the weeks surrounding historical events known to have introduced `news' and turbulence into the markets, including the 1967 devaluation of sterling, the 1972 flotation of sterling, the inception of the European Monetary System, and the 1979 and 1987 UK general elections.
	www.cepr.org /Pubs/bulletin/DPs/dp236.htm (528 words)

	Covered interest arbitrage - Wikipedia, the free encyclopedia
		Covered interest arbitrage is the investment strategy where an investor buys a financial instrument denominated in a foreign currency, and hedges his foreign exchange risk by selling a forward contract in the amount of the proceeds of the investment back into his base currency.
		The proceeds of the investment are only known exactly if the financial instrument is risk-free and only pays interest once, on the date of the forward sale of foreign currency.
		Financial models such as interest rate parity and the cost of carry model assume that no such arbitrage profits could exist in equilibrium, thus the effective dollar interest rate of investing in any currency will equal the effective dollar rate for any other currency, for risk-free instruments.
	en.wikipedia.org /wiki/Covered_interest_arbitrage (333 words)

	Practice Test for Econ 341/541
		Write the equation for the covered interest arbitrage parity (CIAP).
		In the less complicated version of the covered interest arbitrage parity, if the domestic interest rate exceeds that of the foreign interest rate, is the domestic currency at a forward premium or discount?
		Assume you are in zone IV of the covered interest arbitrage parity (CIAP), determine the direction of the flow of funds.
	oak.cats.ohiou.edu /~doroodia/practice_test_341.html (2226 words)

	[No title]
		We now consider the relationship between interest rates (or bond prices) and ex-rates, which are both part of the financial markets, and should respond quickly to new information (economic news).
		INTEREST PARITY (IP) IP condition results from the possibility of covered interest arbitrage, or covered interest parity.
		To investigate, we first distinguish between nominal interest rates observed in the financial and credit markets (prime rate, T-bill rate, student loan rate, bank CD rate, corporate bond rates, mortgage rates, etc.) and real interest rates, which are interest rates that have been adjusted for inflation (Real Rate = Nominal Rate — Inflation Rate).
	spruce.flint.umich.edu /~mjperry/360-15.doc (1326 words)

	Covered Interest Arbitrage \| Strategies, Tips, Secrets, and Advice \| ArbitrageAdvice.com (Site not responding. Last check: 2007-10-15)
		We have a niche in structured funds and a growing interest in hedge funds and funds of hedge funds.
		Covered Interest Arbitrage (CIA) The opportunity to engage in Covered Interest Arbitrage arises when the interest rate difference between the home interest rate and foreign interest rate is not off.
		Is Covered Interest Parity an Arbitrage or a Hedging Condition?, Economia Internazionale, vol 57 (2004), pp 1599-1606.
	www.arbitrageadvice.com /coveredinterestarbitrage (943 words)

	EconPapers: Covered Interest Arbitrage and Market Turbulence: An Empirical Analysis
		Abstract: The covered interest parity (CIP) theorem states that the covered interest differential between two similar assets denominated in different currencies should be zero.
		This paper utilizes high-quality data recorded by the dealers at the Bank of England to test CIP during periods in which news is known to have introduced turbulence into the market, as well as during a relatively calm, control period.
		Third, there appears to be a 'maturity effect' whereby the existence, size and persistence of profitable arbitrage opportunities appear to be a positive function of the length of maturity.
	econpapers.repec.org /paper/cprceprdp/236.htm (322 words)

	[No title]
		If so, explain the steps involved in locational arbitrage, and compute the profit from this arbitrage if you had $1,000,000 to use.
		The one-year interest rate in New Zealand is 6 percent.
		In each case, explain why covered interest arbitrage is or is not feasible.
	www.acsu.buffalo.edu /~kk52/Homework_2.doc (656 words)

	EconPapers: Covered Interest Arbitrage and Market Turbulence
		Abstract: The covered interest parity theorem states that the covered interest differential between two similar assets denominated in different currencies should be zero.
		This paper utilizes high-quality data recorded by the dealers at the Bank of England to test covered interest parity during certain historical periods in which there is known to have been turbulence, as well as during a relatively calm, control period.
		Thirdly, there appears to be a "maturity effect" whereby the existence and size of profitable arbitrage opportunities appear to be positive functions of the length of maturity.
	econpapers.repec.org /article/ecjeconjl/v_3A99_3Ay_3A1989_3Ai_3A396_3Ap_3A376-91.htm (259 words)

	Extra problems 372
		Provide diagrams for all the markets that will be affected by the ensuing covered interest arbitrage, being sure to indicate how the arbitrage activity affects each market.
		4.8 If I told you the interest rate in country A was 5%, and the interest rate in country B was 7%, list three different kinds of reasons why this may be an equilibrium situation (where no interest parity forces are pushing the two rates towards each other).
		Use IS/LM/BP analysis to illustrate the effect of an increase in foreign interest rates on an economy with relatively mobile capital and a flexible exchange rate.
	cob.jmu.edu /elwoodsk/new_page_1.htm (4368 words)

	Transactions Costs and Covered Interest Arbitrage: Theory and Evidence
		The extent to which deviations from covered interest parity can be attributed to transactions costs has been exa ggerated in the economic literature because the swap market in foreig n exchange has been ignored.
		It is shown that such deviations should be no greater than the lowest of the transactions costs in one of thr ee markets: the swap market or either of the two relevant securities markets.
		"Arbitrage with hedging by forward contracts: exploited and exploitable profits," European Journal of Finance, Taylor and Francis Journals, vol.
	ideas.repec.org /a/ucp/jpolec/v96y1988i2p358-70.html (694 words)

	Asymmetric arbitrage and default premiums between the U.S. and Russian financial markets. \| Finance from AllBusiness.com (Site not responding. Last check: 2007-10-15)
		This paper examines covered interest rate arbitrage--that is, interest rate arbitrage where the risk of foreign exchange rate movements are covered in the forward exchange market--between the Russian ruble Treasury bill (GKO) market and the U.S. Treasury bill market, using daily data for the period December 1996 to August 1998.
		In contrast to numerous studies of covered interest rate arbitrage between developed financial markets, (1) significant deviations from covered interest rate parity (CIP) between the ruble and the dollar are discovered.
		Further innovations in this study include our examination of arbitrage between different points of the maturity term structure, rather than just between instruments of the same maturity, and our allowance for asymmetric adjustment to covered interest rate arbitrage opportunities using recently developed nonlinear econometric techniques.
	www.allbusiness.com /finance/206804-1.html (646 words)

	SSRN-Covered Interest Arbitrage: Then versus Now by Ted Juhl, William Miles, Marc Weidenmier
		We introduce a new weekly database of spot and forward US-UK exchange rates and interest rates to examine the integration of forward exchange markets during the classical Gold Standard period (1880-1914).
		Using threshold autoregressions (TARs), we estimate the transaction cost band of covered interest differentials (CIDs) and compare our results with studies of more recent periods.
		We argue that slower information and communications technology during the Gold Standard period led to fewer short-term financial flows, higher transaction costs and larger CIDs.
	papers.ssrn.com /sol3/papers.cfm?abstract_id=896818 (225 words)

	Module 4, Questions and Problems
		Suppose, in the Market, this cross rate is FF 4.2993 per SF.
		As a result of the covered interest arbitrage above, what will happen to:
		To the interest rates in the USA and Britain ?
	www.bsu.edu /classes/rrathina/course/unit4que.htm (266 words)

	Money Market & Bond Calculations
		There are settlement conventions, conventions for calculating accrued interest and much more.
		Instruments covered include corporate bonds, sovereign debt, agency and municipal debt, Fed funds, Repos, Eurodollar futures, FRA's, FRN's, swaps, commercial paper, CD's, options, BA's and medium term notes.
		There is a tremendous amount of practical information here with discussions of carry, short sales, riding the yield curve, duration and convexity, covered interest arbitrage, etc. There is also an extensive glossary of fixed income terms.
	www.riskbook.com /titles/stigum_and_robinson_(1996).htm (169 words)

	The Journal of Finance Content Search
		First, we examine the frequency of attaining simultaneous equilibrium on spot and forward foreign exchange markets and on domestic and foreign securities markets.
		Second, we measure the profitability of covered interest arbitrage and one-way arbitrage.
		The empirical results indicate that: (a) the markets are efficient in the sense that profit opportunities from traditional covered interest arbitrage are rarely available; and (b) the frequency of attaining simultaneous market equilibrium is surprisingly low, thus open the door for one-way arbitrage.
	www.afajof.org /journal/jstabstract.asp?ref=11205 (133 words)

	1
		Explain hedging, speculation, forward exchange contracts, and arbitrage as they specifically relate to the foreign exchange market.
		Explain forward premiums, covered interest arbitrage, and covered interest parity.
		In the asset approach, what four variables are linked together by the theory of uncovered interest parity?
	web.uconn.edu /cunningham/econ243/econ243m.htm (562 words)

	[No title]
		The forward premium on the pound is: [(1.6050-1.6035)/1.6035](12/3)100 = 0.37%¡1±ó¨ International Interest Arbitrage Taking advantage of interest rate differentials. Borrow Low - Lend High Covered interest arbitrage involves the use of a forward contract.ó ¨Covered Interest Arbitrage¨ÂSuppose the three-month Swiss franc eurocurrency rate is 2.75% and the three-month U.S. dollar eurocurrency rate is 5.625%.
		The three-month forward rate is 1.4641.ª”,ó ¨Covered Interest Arbitrage¨À(1+i) = (1+i)(F/S) The interest* rates and forward rates must be for the same period.
		For our example, we take the interest rate and convert it to a quarterly rate.
	www.willamette.edu /~fthompso/IFM/08.currency.ppt (634 words)

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