If the interest rate is lower in the United States than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:
A) U.S. investors could possibly benefit from covered interest arbitrage
B) British investors could possibly benefit from covered interest arbitrage.
C) neither U.S. nor British investors could benefit from covered interest arbitrage.
D) U.S. investors could possibly benefit from covered interest arbitrage AND British investors could possibly benefit from covered interest arbitrage.

Question

Quizplus · Accepted Answer

If the interest rate is lower in the United States than in the United Kingdom, then U.S. investors can borrow at a lower rate and invest in the U.K. with a higher rate. The forward rate being the same as the spot rate means there is no expected depreciation of the British pound, making covered interest arbitrage possible for U.S. investors.

If the Interest Rate Is Lower in the United States