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:

Skilled Reader

An individual who has acquired advanced capabilities in reading, including comprehension, speed, and efficient processing of written material.

Subtle Differences

Minor or not immediately obvious variations between objects, ideas, or situations, often requiring careful analysis to detect.

Gestalt Grouping

A principle in psychology that the mind tends to perceive objects as organized patterns or wholes, rather than as separate components.

Good Continuation

Good continuation is a principle in Gestalt psychology that individuals have a tendency to perceive continuous patterns in stimuli rather than abrupt changes.