Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist?
A)transaction costs
B)political risk
C)differential tax laws
D)all of the above

Question

Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist?​
A)transaction costs
B)political risk
C)differential tax laws
D)all of the above

Quizplus · Accepted Answer

In addition to the absence of interest rate parity, other factors like transaction costs, political risk, and differential tax laws may discourage investors from undertaking covered interest arbitrage. For instance, high transaction costs may make the process of borrowing and investing in different currencies unprofitable, while political instability or crisis in one of the countries involved may increase the risk of currency devaluation, thus rendering covered interest arbitrage less attractive. Finally, differential tax laws may lead to higher tax liabilities on foreign investments, reducing their profitability.

Which of the Following Might Discourage Covered Interest Arbitrage Even