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Arbitrage with hedging by forward contracts: exploited and exploitable profits

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  • 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.

Suggested Citation

  • D. K. Ghosh, 1997. "Arbitrage with hedging by forward contracts: exploited and exploitable profits," The European Journal of Finance, Taylor & Francis Journals, vol. 3(4), pages 349-361.
    • Handle: RePEc:taf:eurjfi:v:3:y:1997:i:4:p:349-361
    DOI: 10.1080/135184797337417
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    References listed on IDEAS

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    1. 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 793-799, August.
    2. S. C. Tsiang, 1959. "The Theory of Forward Exchange and Effects of Government Intervention on the Forward Exchange Market," IMF Staff Papers, Palgrave Macmillan, vol. 7(1), pages 75-106, April.
    3. 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 1028-1035, Nov./Dec..
    4. 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 363-379, March.
    5. Callier, Philippe, 1981. "One Way Arbitrage, Foreign Exchange and Securities Markets: A Note," Journal of Finance, American Finance Association, vol. 36(5), pages 1177-1186, December.
    6. Frenkel, Jacob A & Levich, Richard M, 1975. "Covered Interest Arbitrage: Unexploited Profits?," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 325-338, April.
    7. 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.
    8. 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 351-364, April.
    9. Clinton, Kevin, 1988. "Transactions Costs and Covered Interest Arbitrage: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 358-370, April.
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    Cited by:

    1. Ghosh, Dilip K. & Ghosh, Dipasri & Bhatnagar, Chandra Shekhar, 2010. "Cross-listed cross-currency assets and arbitrage with forwards and options," Global Finance Journal, Elsevier, vol. 21(1), pages 98-110.
    2. Ghosh, Dilip K. & Arize, Augustine & Ghosh, Dipasri, 2015. "Trades in commodities, financial assets, and currencies: A triangle of arbitrage, hedging and speculative designs," Global Finance Journal, Elsevier, vol. 28(C), pages 1-9.
    3. Ghosh, Dilip K. & Ghosh, Dipasri, 2005. "Covered arbitrage with currency options: A theoretical analysis," Global Finance Journal, Elsevier, vol. 16(1), pages 86-98, August.
    4. Dilip K. Ghosh & Augustine C. Arize, 2003. "Profit Possibilities in Currency Markets: Arbitrage, Hedging, and Speculation," The Financial Review, Eastern Finance Association, vol. 38(3), pages 473-496, August.

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