If a currency futures contract (direct quote)is priced below the price implied by Interest Rate Parity (IRP),arbitrageurs could take advantage of the mispricing by simultaneously
A)going short in the futures contract,borrowing in the domestic currency,and going long in the foreign currency in the spot market.
B)going short in the futures contract,lending in the domestic currency,and going long in the foreign currency in the spot market.
C)going long in the futures contract,borrowing in the domestic currency,and going short in the foreign currency in the spot market.
D)going long in the futures contract,borrowing in the foreign currency,and going long in the domestic currency,investing the proceeds at the local rate of interest.

Question

Quizplus · Accepted Answer

When the futures contract is priced below the IRP, arbitrageurs can profit by borrowing in the foreign currency, converting it to the domestic currency at the spot rate, investing it at the domestic interest rate, and simultaneously going long in the futures contract to lock in the future exchange rate for repaying the foreign currency loan.

If a Currency Futures Contract (Direct Quote)is Priced Below the Price