Comment on any work, published or unpublished, is always useful, and on that score I compliment Carl Batlin (1999) for his interesting observations on my work in this Journal (February, 1998). In my paper I have done three things: (i) redefined covered interest rate parity under a modified scenario, (ii) measured covered interest arbitrage profits, and (iii) highlighted iterative arbitrage and profit multiplier, first without and then with transaction costs. Batlin makes comments on the first point, and attempts to invalidate my modified expression of interest rate parity. His attempt is flawed for his confused and incorrect understanding of the Interest Rate Parity Theorem (IRPT). However, his work takes a fresh approach to the interest rate parity theorem within a stochastic framework, and he moves more toward speculation similar to what I have done in my piece (1997) than on covered arbitrage. To make my assertion clear, let me bring out the traditional version the interest rate parity here in the absence of transaction cost, which is consistent with Batlin's analytical structure.
Faced with the choices of investing at home and/or abroad with two known interest rates โซืโฌ (domestic rate, r, and foreign rate, r*), and known