35. Which one of the following formulas illustrates the mechanics of covered interest arbitrage? Assume the is borrowed and = spot rate; = one-year forward rate; = foreign country risk-free rate; and risk-free rate.

Question

35. Which one of the following formulas illustrates the mechanics of covered interest arbitrage? Assume the

is borrowed and 35. Which one of the following formulas illustrates the mechanics of covered interest arbitrage? Assume the is borrowed and = spot rate; = one-year forward rate; = foreign country risk-free rate; and risk-free rate. A) B) C) D) E)

= spot rate; 35. Which one of the following formulas illustrates the mechanics of covered interest arbitrage? Assume the is borrowed and = spot rate; = one-year forward rate; = foreign country risk-free rate; and risk-free rate. A) B) C) D) E)

= one-year forward rate; 35. Which one of the following formulas illustrates the mechanics of covered interest arbitrage? Assume the is borrowed and = spot rate; = one-year forward rate; = foreign country risk-free rate; and risk-free rate. A) B) C) D) E)

= foreign country risk-free rate; and 35. Which one of the following formulas illustrates the mechanics of covered interest arbitrage? Assume the is borrowed and = spot rate; = one-year forward rate; = foreign country risk-free rate; and risk-free rate. A) B) C) D) E)

risk-free rate.

Quizplus · Accepted Answer

Covered interest arbitrage involves borrowing a currency, converting it into another currency, investing it in a risk-free security, and then converting the proceeds back into the original currency at a forward rate to repay the loan. The formula for covered interest arbitrage is:
((1+RF)/(1+RB)) x (S/(1+F)) = 1
where RF is the foreign risk-free interest rate, RB is the domestic risk-free interest rate, S is the spot exchange rate, and F is the forward exchange rate. Choice B is the closest formula to this formula.

35 Which One of the Following Formulas Illustrates the Mechanics