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:

Collusively

Acting in a coordinated manner, often secretly, between firms to set prices or market conditions, usually to the detriment of competition.

Oligopolistic Firms

Companies that operate in a market structure characterized by a small number of firms dominating the market, leading to limited competition.

Pure Monopoly

A market structure where a single supplier dominates the market, offering a unique product with no close substitutes.

Cartels

Organizations of producers or suppliers who collaborate to control production, pricing, and marketing of a product to maximize collective profits.