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

Question

Quizplus · Accepted Answer

Interest rate parity holds when covered interest arbitrage opportunities do not exist, meaning the differences in interest rates between two countries are offset by the forward exchange rate, preventing arbitrage profits.

If Covered Interest Arbitrage Opportunities Do Not Exist