Arbitrage in the ForexMarket: Emerging versus Developed market

Ing. Jith Joy

Master's thesis

Abstract:

Thesis objective: Arbitrage is a practice of earning risk-free profit by exploiting price dis-crepancies in financial market. According to Efficient Market Hypothesis (EMH), arbitrage opportunities does not exist. However, in the Forex market, some arbitrage opportunities may occur. The purpose of this study is to examine the existence of arbitrage opportunities in the Forex Market, specifically aiming to determine violations in CIP theory in developed vs emerging market. Methodology: This study will use the data such as forward, spot and interest rates of cur-rencies of developing and emerging markets of last 5 years, 2019-2023 to determine the presence of violations in CIP theory, which will show the presence of arbitrage opportunities in the Forex market. Findings: This study find the violations in the CIP theory; the right-hand side and left-hand side of CIP equation of developed and emerging market currencies is not equal. Thus, confirming the existence of arbitrage opportunities in the Forex market. Our findings also reveal that emerging markets have more violations in CIP theory, that is more arbitrage op-portunities are present than developed market.

Keywords

Covered interest parity, arbitrage, developed market, emerging market, Forex market

Language used: English

Date on which the thesis was submitted / produced: 10. 5. 2024

Thesis defence

• Date of defence: 18. 6. 2024
• Supervisor: Ph.D. Axel Alejandro Araneda Barahona
• Reader: B.Sc. Andrea Rigamonti, M.Sc.

Masaryk University

Faculty of Economics and Administration

Master programme / field:
Finance / Finance