If covered interest arbitrage opportunities do not exist,
A)interest rate parity does not hold.
B)interest rate parity holds.
C)arbitragers will be able to make risk-free profits.
D)interest rate parity does not hold, and arbitragers will be able to make risk-free profits.

Question

Quizplus · Accepted Answer

If covered interest arbitrage opportunities do not exist, it means that interest rate parity holds. This is because covered interest arbitrage is a practice that occurs when interest rate parity is not holding, and it tries to correct the situation by closing the gap between domestic and foreign interest rates. Therefore, if covered interest arbitrage is not possible, it implies that there is no profit to be made by exploiting interest rate differentials, and interest rate parity must hold.

If Covered Interest Arbitrage Opportunities Do Not Exist