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Is Covered Interest Parity an Arbitrage or a Hedging Condition?

Author

Listed:
  • Moosa, Imad A.

    (Department of Accounting and Finance, Monash University)

Abstract

Although covered interest parity (CIP) can be derived as an arbitrage or a hedging condition in the absence of the bid-offer spreads, the arbitrage condition collapses when the spreads are introduced. It is shown that CIP is better described as a hedging condition, which means that it cannot be used to measure the extent of capital mobility, as typically suggested in the literature. Furthermore, CIP is the results of a banking operation, and it holds irrespective of the market efficiency and the presence or otherwise of capital controls.

Suggested Citation

  • Moosa, Imad A., 2004. "Is Covered Interest Parity an Arbitrage or a Hedging Condition?," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 57(2), pages 189-194.
    • Handle: RePEc:ris:ecoint:0137
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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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