Covered Interest Arbitrage (CIA)activities will result in:
A) unstable international financial markets.
B) restoration of equilibrium quite quickly.
C) disintermediation.
D) no changes in the markets.

Question

Quizplus · Accepted Answer

Covered interest arbitrage involves taking advantage of discrepancies in interest rates between two countries by borrowing in one currency, converting it to another currency to invest at a higher interest rate, and then converting the profits back to the original currency. As more investors engage in CIA activities, it will increase demand for the higher-interest currency, thus driving up its value and lowering the value of the lower-interest currency. Eventually, the equilibrium between the interest rates and exchange rates will be restored. Therefore, CIA activities will result in the restoration of equilibrium quite quickly.

Covered Interest Arbitrage (CIA)activities Will Result In