Which of the Following Is Not True Regarding Covered Interest

question 55

Multiple Choice

Which of the following is not true regarding covered interest arbitrage?

• A) Covered interest arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.
• B) Covered interest arbitrage involves investing in a foreign country and covering against exchange rate risk.
• C) Covered interest arbitrage opportunities only exist when the foreign interest rate is higher than the interest rate in the home country.
• D) If covered interest arbitrage is possible, you can guarantee a return on your funds that exceeds the returns you could achieve domestically.
• E) All of the above are true regarding covered interest arbitrage.

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Definitions:

International Monetary Fund

A global financial institution that provides financial assistance and advice to member countries, aiming to foster global monetary cooperation and financial stability.

Exchange Rates

The value of one currency for the purpose of conversion to another, determining how much of one currency can be exchanged for another.

World Bank

An international banking institution dedicated to providing poorer countries' governments with the financial support needed for capital project development.

Federal Reserve

The central banking system of the United States, responsible for regulating the nation's monetary policy and financial institutions.