There has been rapid growth of trading volume and participating institutions, but few empirical study of the KOFEX(Korean Futures Exchange) dollar/won futures since it launched in 1999. This study may be served as the first empirical study of arbitrage using dollar/won futures.
This paper has three objectives. First, to find the early stage microstructure of dollar/won futures market on pricing behavior and bid-ask spread. Second, to test the market efficiency. Third, to check if there have been arbitrage opportunities and to measure the profitability of covered interest rate parity and one-way arbitrage using ex-ante and ex-post analysis.
This study has been conducted using both daily closing price and intra-day tick price dated from May 1999 to October 2000. The empirical results indicate that : (a) dollar/won futures price and NDF(Non-Deliverable Forward) price have no significant difference; (b)futures spread is decreasing and positively correlated with interest rate difference and volatility; (c) futures price is underpriced; (d) arbitrage opportunities are diminishing, but still exist mainly influenced by bid-ask spread; (e) mispricing rate is positively correlated with time to maturity and spot exchange rate; (f) ex-ante arbitrage profit is smaller than ex-post one; and (g) there has been relatively much room for one-way arbitrage mainly due to the futures market underpricing.
