Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Which of the following forces results from this covered interest arbitrage activity?

Question

Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Which of the following forces results from this covered interest arbitrage activity?​

Quizplus · Accepted Answer

Covered interest arbitrage by Swiss investors involves converting Swiss francs to U.S. dollars to take advantage of higher U.S. interest rates, then using forward contracts to hedge against exchange rate risk. This increases demand for forward contracts on Swiss francs, putting upward pressure on the Swiss franc's forward rate.

Assume That Swiss Investors Are Benefiting from Covered Interest Arbitrage