Mr. Day, economist in the Financial Studies Division of the Research Department, is an external graduate of the University of London and received his doctorate from the University of Birmingham.
Milton Friedman, “The Case for Flexible Exchange Rates,” Essays in Positive Economics (University of Chicago Press, 1953), p. 188.
A purely speculative forward purchase of pounds is equivalent to a combination of an uncovered spot purchase of pounds and a covered spot sale of pounds.
In reality, banks frequently ignore interest earnings when they quote swap rates. See Adam Hepburn, “The Way to True Profit on Interest Arbitrage?” Euromoney (July 1974), pp. 45-47.
Banks normally cover the exchange risk associated with any imbalance in the forward facilities that they provide by operations in the spot market. This is covered interest arbitrage undertaken passively.
It is assumed that current account transactors hold the same expectations as capital transactors.
When an individual gains utility from the value of his wealth measured in, say, U. S. dollars, it is assumed that the individual’s utility is unaffected by changes in the value of his wealth measured in any alternative currency if the U. S. dollar value of his wealth remains unchanged.
See William H. White, “The Portfolio Diversification Argument that Flexible Exchange Rates Will Permit Important Interest Rate Effects on Capital Movements” (unpublished, International Monetary Fund, January 2, 1974).
The most efficient means of eliminating the initial open position would be to intervene steadily over, say, a three-month period to offset open positions as they matured.
It can be argued that it would be preferable under such conditions for the authorities to set the price in the forward exchange market rather than in the spot exchange market. See William H. L. Day, “The Advantages of Exclusive Forward Exchange Rate Support,” Staff Papers, Vol. 23 (March 1976), pp. 137-63.