What Is the "Peso Problem

question 110

Multiple Choice

What is the "peso problem"?

• A) Expectations are realized on average, and returns from interest arbitrage are zero.
• B) Even when exchange rates are fixed, investors often demand a premium for interest arbitrage, so the return from arbitrage can be positive or negative.
• C) Pegged currencies are less stressful for investors because there is no room for speculation.
• D) Returns from interest arbitrage are always positive, even when the peg breaks.

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