If covered interest arbitrage opportunities exist
A)interest rate parity does not hold
B)interest rate parity holds
C)arbitragers will be able to make risk-free profits
D)A and C
E)B and C

Question

Quizplus · Accepted Answer

If covered interest arbitrage opportunities exist, it means that interest rate parity does not hold and there is a difference between the interest rates in different countries. This creates an opportunity for arbitragers to make risk-free profits by borrowing in the lower interest rate country and investing in the higher interest rate country, while using forward contracts to cover their foreign exchange risk. Therefore, both A and C are true.

If Covered Interest Arbitrage Opportunities Exist