Violation of the interest rate parity theorem would allow arbitrage profits.

Question

Quizplus · Accepted Answer

According to the interest rate parity theorem, the difference in interest rates between two countries should be equal to the difference in the forward exchange rate and the spot exchange rate. If this equality is not present, then traders can take advantage of the price difference and make arbitrage profits. Therefore, a violation of the interest rate parity theorem would indeed allow arbitrage profits.

Violation of the Interest Rate Parity Theorem Would Allow Arbitrage