If the interest rate is higher in the United States than in the United Kingdom, and if the forward rate of the British pound (in U.S. dollars) is the same as the pound's spot rate, then:
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

British investors could benefit from covered interest arbitrage because they can convert their pounds to dollars, invest at the higher U.S. interest rate, and use the forward contract to convert back to pounds at no exchange rate risk.

If the Interest Rate Is Higher in the United States