ABSTRACT
In one of his mid-career works in economics, Keynes (1923:107) uses the cost free theory of arbitrage in what we now call frictionless competitive markets to derive the currently well-known ‘interest rate parity theorem’. However, he qualifies this, and refers to ‘the floating capital’ needed for engaging in arbitrage and observes:
It must be remembered that the floating capital… for…taking advantage of…arbitrage profits… is by no means unlimited…
(Our emphasis)