A Model of Covered Interest Arbitrage under Market Segmentation

Lloyd P Blenman

Journal of Money, Credit and Banking, 1991, vol. 23, issue 4, 706-17

Abstract: Existing models of covered interest arbitrage typically assume market participants have equal capital and foreign exchange market access. This paper derives sufficient conditions for the existence of neutral interest parity forward price bands when capital markets are segmented and exchange rates are dually quoted. All forward price intervals are completely characterized in terms of simultaneous two-way and one-way arbitrage flow possibilities. The parameters of the no-arbitrage price region are shown to be established on the basis of relative advantage with respect to the set of available arbitrage strategies. Copyright 1991 by Ohio State University Press.

Date: 1991
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