Kim Deal, an FX trader working at AMBS hedge fund, has uncovered persistent violations of covered interest rate parity for USD (U.S. dollar) and MXN (Mexican Peso) in the market. Using historical data, Kim Deal implements an FX strategy exploiting these opportunities and confirms spectacular $ returns. However, some financial economists argue that such violations are the result of frictions in the market (i.e., limit to arbitrage) while others propose they are a reward for risks.

Critically evaluate this contention of financial economists on Kim Deals discovery with reference to appropriate theories and empirical evidence/methods.

(apr. 2000 words)