The cash-and-carry strategy consists of all of the following simultaneous trades EXCEPT: A)borrow euros today using a one-year loan with the interest rate r_€. B)exchange the euros for dollars today at the spot exchange rate S $/€. C)purchase a forward contract to convert $ to €. D)invest the dollars today for one year at the interest rate r_$.

Question

Quizplus · Accepted Answer

The cash-and-carry strategy involves borrowing money in one currency (in this case, euros) at a low interest rate, exchanging that currency for another currency (dollars) at the spot rate, investing the dollars at a higher interest rate, and then using a forward contract to ensure that the dollars can be converted back into euros at a fixed exchange rate in the future. So, A, B, and D are all components of the cash-and-carry strategy. The only one that is not is C, which involves purchasing a forward contract to convert dollars to euros, but this is not necessary in the cash-and-carry strategy because the investor is already using a forward contract to convert dollars back into euros.

The Cash-And-Carry Strategy Consists of All of the Following Simultaneous