A firm that buys foreign exchange in order to take advantage of higher foreign interest rates is
A)speculating.
B)demonstrating purchasing power parity.
C)engaging in interest rate arbitrage.
D)responding to fluctuations in the business cycle.

Question

Quizplus · Accepted Answer

Engaging in interest rate arbitrage involves exploiting the difference in interest rates between two countries by borrowing in the country with lower interest rates and investing in the country with higher interest rates. This activity can involve buying foreign exchange to fund the investment and is typically done with the aim of making a profit.

A Firm That Buys Foreign Exchange in Order to Take