Covered interest arbitrage opportunities in the South African foreign exchange market
The Interest Parity Theory states that in an efficient market, any interest differential between local and foreign sources of finance will be offset by the forward premium/discount. Therefore, opportunities to engage in profitable Covered Interest Arbitrage transactions will be eliminated quickly. T...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
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AOSIS
1987-12-01
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| Series: | South African Journal of Business Management |
| Online Access: | https://sajbm.org/index.php/sajbm/article/view/1019 |
| Summary: | The Interest Parity Theory states that in an efficient market, any interest differential between local and foreign sources of finance will be offset by the forward premium/discount. Therefore, opportunities to engage in profitable Covered Interest Arbitrage transactions will be eliminated quickly. The fall in the Rand/Dollar exchange rate resulted in many South African companies reporting substantial foreign exchange losses on offshore loans. Companies were attracted to foreign sources of finance because of lower foreign interest rates. The authors conclude, on the basis of empirical tests, that the forward Rand/Dollar exchange rate followed its interest parity value very closely over the period August 1983 - August 1985. Opportunities to engage in risk-free arbitrage activities were offset by related transaction costs. The South African foreign exchange market is efficient to the extent that risk-free profit opportunities did not exist for the period under review and therefore there was no benefit, after adjusting for risk, for South African management to borrow from offshore sources of finance. |
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| ISSN: | 2078-5585 2078-5976 |