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Arbitrage with hedging by forward contracts: exploited and exploitable profits

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Author Info
D. K. Ghosh
Abstract

The theoretical conditions for covered interest arbitrage and exploitable profit opportunities out of simple and triangular arbitrage in the absence and presence of market imperfection are enunciated. A distinction is made between pure arbitrage profits and arbitrage-induced total profits attainable under the risk free environment. Operational feasibility of iterative arbitrage is also examined.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal The European Journal of Finance.

Volume (Year): 3 (1997)
Issue (Month): 4 (December)
Pages: 349-361
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Handle: RePEc:taf:eurjfi:v:3:y:1997:i:4:p:349-361

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Related research
Keywords: Arbitrage Hedging Forward Contracts Program Trading Orders Ulation;

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  1. Frenkel, Jacob A & Levich, Richard M, 1975. "Covered Interest Arbitrage: Unexploited Profits?," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 325-38, April. [Downloadable!] (restricted)
  2. Ghosh, Dilip K., 1997. "Risk-free profits with forward contracts in exchange rates and interest rates," Journal of Multinational Financial Management, Elsevier, vol. 7(3), pages 253-264, October. [Downloadable!] (restricted)
  3. Deardorff, Alan V, 1979. "One-Way Arbitrage and Its Implications for the Foreign Exchange Markets," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 351-64, April. [Downloadable!] (restricted)
  4. Clinton, Kevin, 1988. "Transactions Costs and Covered Interest Arbitrage: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 358-70, April. [Downloadable!] (restricted)
  5. Bahmani-Oskooee, Mohsen & Das, Satya P, 1985. "Transaction Costs and the Interest Parity Theorem," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 793-99, August. [Downloadable!] (restricted)
  6. Branson, William H, 1969. "The Minimum Covered Interest Differential Needed for International Arbitrage Activity," Journal of Political Economy, University of Chicago Press, vol. 77(6), pages 1028-35, Nov./Dec.. [Downloadable!] (restricted)
  7. Rhee, S Ghon & Chang, Rosita P, 1992. " Intra-day Arbitrage Opportunities in Foreign Exchange and Eurocurrency Markets," Journal of Finance, American Finance Association, vol. 47(1), pages 363-79, March. [Downloadable!] (restricted)
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