International Arbitrage And

Interest Rate Parity

See c7.xls for spreadsheets to

accompany this chapter.

South-Western/Thomson Learning © 2003

INTERNATIONAL ARBITRAGE

ARBITRASI ADALAH TINDAKAN MENGAMBIL

KEUNTUNGAN SBG AKIBAT ADANYA
KETIDASESUAIAN ANTARA NILAI AKTUAL DG
NILAI YG SEHARUSNYA.

A ARBITRASI
B

Rp 425.000/gram Rp 420.000/gram

Perbedaan terjadi karena : kondisi permintaan & lokasi

The Type of Arbitrage
 Locational Arbitrage
 Triangular Arbitrage
 Covered Interest Arbitrage
 International Arbitrage
 LOCATIONAL ARBITRAGE :
 TINDAKAN UNTUK MENGAMBIL KEUNTUNGAN
DARI KETIDAKSESUAIAN DALAM KUOTASI-
KUOTASI NILAI TUKAR ANTAR BANK.
Contoh 1 :
Tidak ada bid-ask

Bank
Bank
A
B

1 £ = $1,60 1 £ = $ 1.61
Return yang diperoleh merupakan return bebas risiko
dan tanpa modal
 International Arbitrage

 Example 2:
Kuotasi £

BANK A BANK B
BID ASK BID ASK
$ 1.60 $ 1.61 $ 1.61 $ 1.62

Bisakah anda memanfaatkan Arbitrasi ini untuk

memperoleh gain?
Example 3 :
Bank C Bid Ask Bank D Bid Ask
NZ$ $.635 $.640 NZ$ $.645 $.650

NZ$ NZ$
$
$

Foreign Exchange
Market Participants

Bila anda memiliki $ 10,000 berapa gain yang bisa anda peroleh?

Buy NZ$ from Bank C @ $.640, and sell it to Bank D @ $.645.

Profit = $.005/NZ$.
 TRIANGULAR ARBITRAGE

 TINDAKAN MENGAMBIL KEUNTUNGAN DARI

KETIDAKSESUAIAN DALAM PASAR VALAS YAITU
SAAT KURS SILANG YG DIKUOTASIKAN DI
PASAR TIDAK SAMA DG KURS SILANG YG
SEHARUSNYA MUNCUL DALAM EKUILIBRIUM.
CONTOH 1

Bank A Bank B
£ = $2.00 FF = $.20

Bank C
£=FF 11
International Arbitrage
 Triangular arbitrage
 Example: Bid Ask
British pound (£) $1.60 $1.61
Malaysian ringgit (MYR) $.200 $.202
£ MYR8.1 MYR8.2

Buy £ @ $1.61, convert @ MYR8.1/£,

then sell MYR @ $.200. Profit = $.01/£. (8.1.2=1.62)
International Arbitrage

$
Value of Value of
£ in $ MYR in $

£ MYR
Value of
£ in MYR

 When the exchange rates of the currencies

are not in equilibrium, triangular arbitrage
will force them back into equilibrium.
Bagaimana anda akan berspekulasi?

BANK A BANK B BANK C

BID $ 1.990/ £ $ 0.200/FF FF 10.8/ £
ASK $ 2.000/ £ $ 0.210/FF FF 11.0/ £
International Arbitrage
 Covered interest arbitrage
INVESTASI DALAM SEKURITAS PASAR UANG LUAR
NEGERI YG PADA SAAT YG SAMA DISERTAI DG
PENJUALAN FORWARD VALUTA YG MENDENOMINASI
SEKURITAS YG DIMAKSUD.
BEDANYA DG SEBELUMNYA :
 PERLU DANA UNTUK INVESTASI
 INVESTASI DI LUAR NEGERI
 MELAKUKAN HEDGING DG FORWARD POSISI SHORT

 Bagaimana CIA ini bekerja?

International Arbitrage
 Example: You have $ 800,000 to invest
£ spot rate = 90-day forward rate = $1.60
U.S. 90-day interest rate = 2%
U.K. 90-day interest rate = 4%
Borrow $ at 2%, or use existing funds
which are earning interest at 2%. Convert
$ to £ at $1.60/£ and engage in a 90-day
forward contract to sell £ at $1.60/£. Lend
£ at 4%.
Apakah investor AS layak menggunakan
CIA?
Informasi yang tersedia
Kurs spot £ = $1.60
Kurs forward 180 hari dari £ = $1.56
Suku bunga di UK 180 hari = 4%
Suku bunga di AS 180 hari = 3%
Online Application
 Spot exchange rates can be found online at
http://sonnet-financial.com/rates/full.asp,
while forward rates can be found at
http://www.bmo.com/economic/regular/fxr
ates.html,
and interest rates at
http://www.federalreserve.gov/releases/H1
5/update/.
International Arbitrage
 Locational arbitrage ensures that quoted
exchange rates are similar across banks in
different locations.
 Triangular arbitrage ensures that cross
exchange rates are set properly.
 Covered interest arbitrage ensures that
forward exchange rates are set properly.
Interest Rate Parity (IRP)
 Market forces cause the forward rate to differ
from the spot rate by an amount that is
sufficient to offset the interest rate differential
between the two currencies.
 Then, covered interest arbitrage is no longer
feasible, and the equilibrium state achieved is
referred to as interest rate parity (IRP).
PARITAS SUKU BUNGA (IRP =
INTEREST RATE PARITY)

 KONDISI EKUILIBRIUM DIMANA SELISIH

SUKU BUNGA ANTARA DUA VALUTA
DIIMBANGI OLEH SELISIH KURS
FORWARD DENGAN KURS SPOT
 DERIVASI IRP :
HUBUNGAN ANTARA PREMIUM
/DISKON FORWARD DENGAN SUKU
BUNGA MENURUT IRP DAPAT
DITENTUKAN SBB :
 (PENGEMBALIAN DARI CIA BAGI INVESTOR AS......INI
ASUMSI)

 Ah = JUMLAH VALUTA DOMESTIK ($) YG INGIN DIINVEST

 S = KURS SPOT DALAM DOLLAR YG DIKUOTASI BANK
 if = SUKU BUNGA LUAR NEGERI
 F = KURS FORWARD DALAM DOLLAR
 JUMLAH VALUTA DOMESTIK YG DITERIMA PADA AKHIR PERIODE :
An = (Ah/S) (1 + if) F
 KARENA F ADALAH S KALI (1 + PREMIUM FORWARD --ATAU p) :
An = (Ah/S) (1 + if)[S(1 + p)]
= Ah (1 + if)(1 + p)
TINGKAT PENGEMBALIAN DARI INIVESTASI INI ADALAH
r = (An - Ah)/Ah
= [Ah (1 + if)(1 + p)] - Ah
Ah
= (1 + if)(1 + p) - 1
 JIKA IRP EKSIS, MAKA

r = ih
ih = SUKU BUNGA DEPOSITO BERJANGKA NEGARA ASAL
ih = (1 + if)(1 + p) - 1
p = (1 + ih)/ (1 + if) - 1

Kasus :
SUKU BUNGA BERJANGKA UNTUK 6 BULAN DI PERANCIS =
6% SUKU BUNGA BERJANGKA UNTUK 6 BULAN DI AS =
5%. BILA KURS SPOT ADALAH $ 0.10/FF
MENURUT IRP BERAPA PREMIUM ATAU DISKON?
BERAPA KURS FORWARD 6 BULAN ? INGAT F = S (1 + p)
APAKAH INVESTOR AS ($1.000.000) BISA MEMPEROLEH
KEUNTUNGAN DENGAN MEMANFAATKAN CIA?
HUBUNGAN ANTARA PREMIUM (ATAU
DISKON) FORWARD DENGAN SELISIH
SUKU BUNGA
F S
p  ih  i f
S

ih = SUKU BUNGA DOMESTIK

if = SUKU BUNGA LUAR NEGERI
p = PREMIUM/DISKON FORWARD
F = KURS FORWARD DALAM VALAS
DOMESTIK
S = KURS SPOT DALAM VALAM DOMESTIK
Derivation of IRP
 End-value of a $1 investment in the home
country = 1 + iH
 Equating the two and rearranging terms:

p =
(1+iH) – 1
(1+iF)
i.e.
forward = (1 + home interest rate) – 1
premium (1 + foreign interest rate)
Determining the Forward Premium
Example:
 Suppose 6-month ipeso = 6%, i$ = 5%.
 From the U.S. investor’s perspective,
forward premium = 1.05/1.06 – 1  - .0094
 If S = $.10/peso, then
6-month forward rate = S  (1 + p)
_
 .10  (1 .0094)
 $.09906/peso
Determining the Forward Premium
 Note that the IRP relationship can be
rewritten as follows:
F – S = S(1+p) – S = p = (1+iH) – 1 = (iH–iF)
S S (1+iF) (1+iF)

 The approximated form, p  iH–iF, provides a

reasonable estimate when the interest rate
differential is small.
Graphic Analysis of Interest Rate Parity
Interest Rate Differential (%)
home interest rate – foreign interest rate
4

IRP line
2 D

C Y

Forward -3 -1 1 3 Forward
Discount (%) Premium (%)
Z A

B -2
X
i& p hrs konsisten
Mingguan, bln, thn
-4
Graphic Analysis of Interest Rate Parity
Interest Rate Differential (%)
home interest rate – foreign interest rate
4
Zone of potential
covered interest IRP line
arbitrage by
foreign investors 2

Forward -3 -1 1 3 Forward
Discount (%) Premium (%)
Zone of potential
- 2 covered interest
arbitrage by
local investors
-4
Test for the Existence of IRP
 To test whether IRP exists, collect the actual
interest rate differentials and forward
premiums for various currencies. Pair up data
that occur at the same point in time and that
involve the same currencies, and plot the
points on a graph.
 IRP holds when covered interest arbitrage is
not worthwhile.
Interpretation of IRP
 Jika IRP eksis, maka investor-investor asing
akan menghasilkan pengembalian yang
sama dengan investor-investor domestik.
 Hal itu berarti bahwa investor-investor tidak
dapat menggunakan CIA untuk mendapatkan
pengembalian yang lebih tinggi dari
pengembalian yang bisa didapatkan di dalam
negara mereka masing-masing.
Does IRP Hold?
 Untuk menentukan secara tepat apakah IRP
eksis, perlu membandingkan kuotasi kurs
forward dengan kuotasi suku bunga pada suatu
waktu tertentu?
 Tetapi data terbatas, sehingga data yang dipakai
adalah pada rentang waktu yang berbeda. Dan
ini menimbulkan distorsi, sehingga pengujian
IRP bisa mengandung sejumlah kesalahan.
 Meski demikian hal ini tidak menghambat upaya-
upaya pengujian
Does IRP Hold?
 Various empirical studies indicate that IRP
generally holds.
 Walaupun terdapat sejumlah deviasi, deviasi
tersebut tidak cukup besar untuk membuat
CIA berharga untuk dilakukan.
Contoh hasil penelitian
 Aliber
 Branson
 Frenkel & Levich
 Stokes & Neuburger.
Does IRP Hold?
 Jika IRP tidak eksis?
 Belum tentu CIA cukup berharga untuk
dilakukan, mengapa?
 Adanya biaya-biaya potensial yang muncul
jika berinvestasi di luar negeri. Biaya-biaya
tersebut misalnya biaya transaksi, kebijakan
restriksi valuta, undang-undang pajak.
 Sehingga kalau investor akan menggunakan
CIA dengan mempertimbangkan biaya-biaya
tersebut, maka grafiknya akan berubah
Considerations When Assessing IRP
Transaction Costs

iH – iF
IRP line
Zone of potential
covered interest
arbitrage by
foreign investors Zone of
p potential
Zone where covered
covered interest interest
arbitrage is not arbitrage
feasible due to by local
transaction costs investors
Considerations When Assessing IRP
Political Risk
 A crisis in the foreign country could cause its
government to restrict any exchange of the
local currency for other currencies.
 Investors may also perceive a higher default
risk on foreign investments.
Differential Tax Laws
 If tax laws vary, after-tax returns should be
considered instead of before-tax returns.
Explaining Changes in Forward Premiums
iA
Interest Rates
Because of IRP,
iU.S.
a forward rate
will normally
move in tandem
with the spot
t0 t1 t2 time
rate.
Forward Rates

This correlation
Spot and

SA
depends on
FA
interest rate
movements,
t0 t1 t2 time i.e. p  iH–iF
Explaining Changes in Forward Premiums
 During the 1997-98 Asian crisis, the
forward rates offered to U.S. firms on some
Asian currencies were substantially
reduced for two reasons.
 The spot rates of these currencies declined
substantially during the crisis.
 Their interest rates had increased as their
governments attempted to discourage
investors from pulling out their funds.
Online Application
 Find out more about the 1997-98 Asian
financial crisis by visiting
http://www.stern.nyu.edu/globalmacro/.
Impact of Arbitrage on an MNC’s Value
Forces of Arbitrage

m 
n 
 
E CFj , t  E ER j , t  
 j 1 
Value =   
t =1  1  k  t

 
E (CFj,t ) = expected cash flows in currency j to
be received by the U.S. parent at the end of
period t
E (ERj,t ) = expected exchange rate at which
currency j can be converted to dollars at the end
of period t
 Kembali ke soal latihan Chapter 5
 Soal latihan CH 5, bila kuotasi Settlement
didasarkan pada eksistensi teori IRP, dan
proyeksi rate of interest di kedua negara
sebagai berikut:
rate of interest
Tanggal Inggris USA
11/19/2007 3 5
11/20/2007 5 2
11/21/2007 4 6
11/22/2007 7 3
11/23/2007 3 5
11/26/2007 4 7