Interest Rate Arbitrage in Currency Baskets: Forecasting Weights and Measuring Risk
Electronic Access:
Free Download. Use the free Adobe Acrobat Reader to view this PDF file
Summary:
When constructing hedged interest rate arbitrage portfolios for basket currencies, two issues arise: first, how are the unknown future basket weights optimally forecasted from past exchange rate data? And, second, how is risk—in terms of the conditional variance of expected profits from the interest rate arbitrage portfolio—appropriately measured when the basket weights are time-varying? Answers to these questions are provided within a time-varying parameter modeling framework estimated through the Kalman filter. An empirical application is devoted to the experience of the Thai baht currency basket (January 1992–February 1997).
Series:
Working Paper No. 1999/016
Subject:
Banking Conventional peg Currencies Exchange rates Expenditure Financial regulation and supervision Foreign exchange Hedging Money Public expenditure review
English
Publication Date:
January 1, 1999
ISBN/ISSN:
9781451843385/1018-5941
Stock No:
WPIEA0161999
Pages:
30
Please address any questions about this title to publications@imf.org