If a Currency Futures Contract (Direct Quote)is Priced Below the Price

question 69

Multiple Choice

If a currency futures contract (direct quote) is priced below the price implied by Interest Rate Parity (IRP) ,arbitrageurs could take advantage of the mispricing by simultaneously

• A)going short in the futures contract,borrowing in the domestic currency,and going long in the foreign currency in the spot market.
• B)going short in the futures contract,lending in the domestic currency,and going long in the foreign currency in the spot market.
• C)going long in the futures contract,borrowing in the domestic currency,and going short in the foreign currency in the spot market.
• D)going long in the futures contract,borrowing in the foreign currency,and going long in the domestic currency,investing the proceeds at the local rate of interest.

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Definitions:

Investments

The allocation of resources, typically money, in the expectation of generating an income or profit.

National Income

The total value of all goods and services produced by a country's economy over a specific period, including income from abroad, indicating economic health.

Salaries

Regular payments made by an employer to an employee, usually on a monthly or biweekly basis, for professional services rendered.

GDP

Gross Domestic Product, the total monetary value of all final goods and services produced within a country's borders in a specific time period, a primary indicator of economic health.