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

M. L. Burstein
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M. L. Burstein: York University

Chapter 3 in Open-Economy Monetary Economics, 1989, pp 43-72 from Palgrave Macmillan

Abstract: 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.)

Keywords: Exchange Rate; Interest Rate; Real Interest Rate; Nominal Interest Rate; Future Contract (search for similar items in EconPapers)
Date: 1989
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DOI: 10.1007/978-1-349-10963-0_3

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