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Lecture Three: Topics in Open-economy Financial Mechanisms: Interest Parity; Overshooting; Euro-currency Markets

In: Open-Economy Monetary Economics

Author

Listed:
  • M. L. Burstein

    (York University)

Abstract

Kindleberger (1958) explains interest arbitrage more transparently than is now the fashion. The link between the forward and spot rates of exchange is the rate of interest in the two markets involved and … interest arbitrage … If the three months interest rate is three per cent per annum in London and one per cent in New York … three months’ sterling should sell at a discount equivalent to two per cent per annum. This rate … is $2.786, given a spot rate of $2.80 and a discount of $0.014. If forward sterling is sold at any higher price, it would be profitable for banks in New York to put more spot funds in London and sell these forward. Kindleberger (1958, p. 591) (For an excellent more recent, and more technical, discussion supporting the covered interest arbitrage hypothesis, see Clinton, 1988, pp. 358–70.)

Suggested Citation

  • M. L. Burstein, 1989. "Lecture Three: Topics in Open-economy Financial Mechanisms: Interest Parity; Overshooting; Euro-currency Markets," Palgrave Macmillan Books, in: Open-Economy Monetary Economics, chapter 3, pages 43-72, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-10963-0_3
    DOI: 10.1007/978-1-349-10963-0_3
    as

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