Is Covered Interest Parity an Arbitrage or a Hedging Condition?

Imad A. Moosa ()
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Imad A. Moosa: Department of Accounting and Finance, Monash University, Postal: PO Box 197 Caulfield East 3145 Victoria Australia ,, http://www.monash.edu.au

Economia Internazionale / International Economics, 2004, vol. 57, issue 2, 189-194

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.

JEL-codes: F31 F37 (search for similar items in EconPapers)
Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:ris:ecoint:0137

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