If the expected uncovered interest differential is _____, then the expected overall return favors uncovered investing in the foreign-denominated currency.

Question

Quizplus · Accepted Answer

Uncovered investing means borrowing in your home currency and investing in a foreign currency. The return on this investment could be affected by the exchange rate movement. The uncovered interest differential is the difference between the interest rates of the two currencies. If the expected uncovered interest differential is positive, it means the foreign currency offers a higher interest rate than the home currency. In this case, the expected overall return would favor uncovered investing in the foreign currency because the return from the interest rate differential would likely offset any loss due to exchange rate movement. Therefore, option A is correct.

If the Expected Uncovered Interest Differential Is _____, Then the Expected