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Volume :4 Issue : 2 1997      Add To Cart                                                                    Download

Hedging and Arbitrage When the Base Currency is Pegged to a Basket

Auther : Imad A. Moosa

This paper examines hedging and arbitrages in the foreign exchange market, in the particular case of the base currency being pegged to a basket. The sources of foreign exchanges risk arising from taking long and short positions on a multi- currency portfolio are identified, and the findings are used to design some hedging and arbitrage rules. These rules make it possible to minimize foreign exchange risk arising from a long position on a portfolio, and to arbitrage the interest rate differential by taking either short or long positions on the portfolio. Some empirical evidence on the hedging rules is presented using the SDR as a base currency.

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