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Covered interest parity and the relative effectiveness of forward and money market hedging

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  • Nabeel Al-Loughani
  • Imad Moosa

Abstract

In this paper it is shown that obtaining equally effective forward hedging and money market hedging implies and is implied by the validity of covered interest parity. This proposition is demonstrated by constructing combined positions consisting of long exposures on five currencies and short exposures on the hedging instruments. An indirect test of CIP would then boil down to testing the difference between the variances of the rates of return on the combined positions.

Suggested Citation

  • Nabeel Al-Loughani & Imad Moosa, 2000. "Covered interest parity and the relative effectiveness of forward and money market hedging," Applied Economics Letters, Taylor & Francis Journals, vol. 7(10), pages 673-675.
    • Handle: RePEc:taf:apeclt:v:7:y:2000:i:10:p:673-675
    DOI: 10.1080/135048500416003
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    Cited by:

    1. Kuo-Shing Chen & Chien-Chiang Lee & Chun-Ming Chen, 2017. "Arbitrage, Covered Interest Parity and Cointegration Analysis on the New Taiwan Dollar/US Dollar FOREX Market Revisited," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 420-428.
    2. Bilson, Chris & Brailsford, Tim & Rajaguru, Gulasekaran, 2022. "Covered interest rate parity deviations in the Asia-Pacific," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 77(C).
    3. Kuga Iakov & Elena Kuzmina, 2016. "Covered interest parity: evidence from Russian money market," EERC Working Paper Series 16/01e, EERC Research Network, Russia and CIS.
    4. Skinner, Frank S. & Mason, Andrew, 2011. "Covered interest rate parity in emerging markets," International Review of Financial Analysis, Elsevier, vol. 20(5), pages 355-363.

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