When the spot and forward exchange markets are not in equilibrium as described by interest rate parity, the potential for "riskless" arbitrage profit exists. This is called

Question

Quizplus · Accepted Answer

When the spot and forward exchange markets are not in equilibrium, there is an opportunity for covered interest arbitrage, which involves borrowing in one currency, converting it into another currency, investing in that currency, and then converting back and repaying the initial loan. This can result in riskless profits. Therefore, option A is the correct answer. Option B refers to the state of equilibrium itself, option C refers to a theory about the relationship between inflation and interest rates, and option D is not relevant to the question.

When the Spot and Forward Exchange Markets Are Not in Equilibrium