WSEAS Transactions on Business and Economics
Print ISSN: 1109-9526, E-ISSN: 2224-2899
Volume 12, 2015
Deviation from Covered Interest Parity and the Influence of Arbitragers and Speculators in Asian Currency Markets
Authors: Suresh Ramanathan, Kwek Kian-Teng
Abstract: Covered interest parity occurs when the no-arbitrage condition is satisfied with the use of a foreign exchange forward contract to hedge against exposure to foreign exchange rate risk when interest rate parity is covered. Agents in the foreign exchange market will be indifferent to the available interest rates in the two currencies because the forward exchange rate achieves equilibrium, thereby eliminating the potential to realize covered interest arbitrage profits. Covered interest rate parity holds when there is open capital mobility. In this paper we identify deviation from covered interest parity that incorporates the onshore and offshore foreign exchange forward market of Emerging Asia. The model is able to identify the behavioural pattern of arbitragers and speculators in foreign exchange forward markets. This exercise provides fresh insights for central banks and financial regulators in managing capital mobility in a prudent and effective manner.
Keywords: Capital Mobility Covered Interest Parity Model, Arbitragers, Speculators, Onshore and Offshore Foreign Exchange Forward Market, Arbitrage Profit and Loss, Emerging Asia
Pages: 261-270WSEAS Transactions on Business and Economics, ISSN / E-ISSN: 1109-9526 / 2224-2899, Volume 12, 2015, Art. #24