Richard M. Levich, Discussion: The Denomination of Foreign Trade Contracts Once Again, The Journal of Financial and Quantitative Analysis, Vol. 15, No. 4, Proceedings of 15th Annual Conference of the Western Finance Association, June 19-21, 1980, San Diego, California (Nov., 1980), pp. 945-947

This paper deals with the effects of transaction costs on the efficacy of covered interest arbitrage during three periods: 1962-67, the tranquil peg; 1968-69, the turbulent peg; and 1973-75, the managed float. Several conclusions emerge: (i) during the managed float transaction costs have risen dramatically, (ii) these costs played a similar role in accounting for deviations from parity during the periods of the tranquil peg and the managed float but not during the turbulent peg. Similar conclusions emerge from a time-series analysis of the various exchange rates with the implication that a classification of periods according to the degree of turbulence is preferred to a classification based on the legal arrangement (e.g., pegged or floating rates), and (iii) covered interest arbitrage does not seem to entail unexploited opportunities for profits.

This paper deals with the effects of transaction costs on the efficacy of covered interest arbitrage during three periods: 1962-67, the tranquil peg; 1968-69, the turbulent peg; and 1973-75, the managed float. Several conclusions emerge: (i) during the managed float transaction costs have risen dramatically, (ii) these costs played a similar role in accounting for deviations from parity during the periods of the tranquil peg and the managed float but not during the turbulent peg. Similar conclusions emerge from a time-series analysis of the various exchange rates with the implication that a classification of periods according to the degree of turbulence is preferred to a classification based on the legal arrangement (e.g., pegged or floating rates), and (iii) covered interest arbitrage does not seem to entail unexploited opportunities for profits.

Empirical studies of covered interest arbitrage suggest that the parity condition is not always satisfied and thus implying unexploited profit opportunities. This paper provides a procedure for estimating transaction costs in the markets for foreign exchange and for securities. Allowance for these costs accounts for most of the apparent profit opportunities. It is shown that in addition to transaction costs, demand and supply elasticities in the various markets and lags in executing arbitrage can account for all of the apparent profit opportunities. It is concluded that empirical data are consistent with the interest parity theory and that covered interest arbitrage does not entail unexploited profit opportunities.

We construct the network, centrality measures, and attributions of trading profits for a sample of CLS Bank settlement data that spans diverse currency pairs, participants, and execution platforms. We define an average centrality differential as the return to the more-central counterparty in the trade. Estimates imply that the more-central counterparty receives a higher return, and that this differential increases as the counterparties’ centralities diverge. These two results are consistent with a pervasive centrality premium. This premium may reflect bargaining power, but we also find evidence that the premium is partially offset by losses that central agents incur in supplying liquidity.