Covered Interest Rate Arbitrage Is Possible When

question 21

Multiple Choice

Covered interest rate arbitrage is possible when:

• A) both currencies are appreciating.
• B) the actual inflation rates are identical in both countries.
• C) the difference in the interest rates in two countries exactly equals the spot-to-forward exchange rate differential.
• D) the difference in interest rates in two countries is out of line with the spot-to-forward exchange rate differential.
• E) none of the above

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Definitions:

Positive Profits

Financial gains achieved when the total revenues exceed the total costs of a business.

Long-Run

In economics, the Long-Run is a period during which all input factors of production and costs are variable, allowing for the adjustment of all possible variables.

Short-Run Profits

Profits earned by a firm in a period where at least one factor of production is fixed.

Perfectly Competitive

Refers to a market structure where many firms sell an identical product, and no single firm can influence the market price due to its small market share.