If Interest Rate Parity Does Not Hold

question 37

Multiple Choice

If interest rate parity does not hold,

• A) covered interest arbitrage opportunities will exist.
• B) covered interest arbitrage opportunities will not exist.
• C) arbitragers will be able to make risk-free profits.
• D) covered interest arbitrage opportunities will exist, and arbitragers will be able to make risk-free profits.
• E) covered interest arbitrage opportunities will not exist, and arbitragers will be able to make risk-free profits. If interest rate parity holds, covered interest arbitrage opportunities will not exist.

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Definitions:

Horizontal Acquisition

The merger or takeover of one company by another in the same industry or production stage, aiming for growth or reducing competition.

Ford

An American multinational automaker founded by Henry Ford, known for mass-producing affordable vehicles and pioneering assembly line production techniques.

General Motors

An American multinational corporation headquartered in Detroit that designs, manufactures, markets, and distributes vehicles and vehicle parts.

Greenmail

A situation where a company pays a premium to buy back its own stock from a shareholder to avert a takeover attempt.