Tobin tax etc.
Jordan Hayes
jmhayes at j-o-r-d-a-n.com
Mon Jun 1 19:49:06 PDT 1998
> Why should an investor do such a roundabout excursion [don't myself
> follow the rest--rb]? In a situation where the covered interest rate
> parity holds an arbitrage of this type reduces exchange risk, but
> does not add to profit. However, the presence of risk premium in
> currency and capital markets can carve out scope for profit making.
I don't buy it. In a normal world, the forward rate *is* the
interest rate differential in this case; that is, if you did what
this guy says to do, you'd wind up with almost exactly a long
position in US interest rate futures. I say 'almost' because, due
to spreads and volatility, you'd actually wind up getting slightly
less than you would with the outright position. This even makes
sense, because you'd be doing more work to establish the same
position.
/jordan
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