The cash-and-carry strategy consists of all of the following simultaneous trades,EXCEPT:
A)borrow euros today using a one-year loan with the interest rate r€.
B)exchange the euros for dollars today at the spot exchange rate S $/€.
C)purchase a forward contract to convert $ to €.
D)invest the dollars today for one year at the interest rate r$.

Question

Quizplus · Accepted Answer

The cash-and-carry strategy involves borrowing a foreign currency at a low interest rate, exchanging it for another currency at the spot rate, investing that currency at a higher interest rate, and purchasing a forward contract to sell that currency back at a known rate in the future. Option C, purchasing a forward contract to convert $ to €, is not part of the cash-and-carry strategy as this would involve borrowing dollars, not euros.

The Cash-And-Carry Strategy Consists of All of the Following Simultaneous