Tobin tax etc.

Jordan Hayes jmhayes at
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.


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