If the interest rate is lower in the United States than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:
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)A and B

Question

If the interest rate is lower in the United States than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:​
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)A and B

Quizplus · Accepted Answer

If the interest rate is lower in the United States than in the United Kingdom, U.S. investors could borrow funds in the U.S. at a lower interest rate, convert them into British pounds, and invest them in the U.K. at a higher interest rate. Then they could use the forward rate to convert their pounds back into dollars at the same spot rate, effectively locking in a profit from the interest rate differential. This is known as covered interest arbitrage. British investors would not benefit from this scenario as they would have to pay a higher interest rate to borrow funds in the U.K. compared to investing in the U.S.

If the Interest Rate Is Lower in the United States