Assume That the Interest Rate on Borrowings in India Is

question 35

Multiple Choice

Assume that the interest rate on borrowings in India is 1 percent while the interest rate on bank deposits in a U.S. bank is 4 percent. Carlos, an active currency trader, borrows in Indian rupees, converts the money into U.S. dollars and deposits it in a U.S. bank. What is the speculative element of this carry trade?

• A) There will be no adverse movement in exchange rates or interest rates.
• B) Liquidity is the key factor in determining interest rates.
• C) Increasing money supply will not drive inflation.
• D) Spot exchange rates are more favorable than forward exchange rates.
• E) Hedging insures a company against foreign exchange risks.

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