The existence of a forward-spot differential creates an arbitrage opportunity that will eliminate the differential almost immediately.

Question

Quizplus · Accepted Answer

The existence of a forward-spot differential does not necessarily create an arbitrage opportunity, as it may reflect the market's expectations of future interest rates, inflation, or other factors. Arbitrage opportunities arise only if the differential is mispriced relative to these factors.

The Existence of a Forward-Spot Differential Creates an Arbitrage Opportunity