In the context of covered interest arbitrage,the spot-forward differential refers to the difference between:
A)the current interest rate and the interest rate at a specific date in the future.
B)the spot or current exchange rate of a currency and the forward or predetermined exchange rate of that currency at a specific date in the future.
C)the spot or current exchange rate of a currency and the to-be-determined exchange rate of that currency at a specific date in the future.
D)the total,combined current exchange rate plus the future exchange rate.

Question

Quizplus · Accepted Answer

The spot-forward differential is the difference between the spot or current exchange rate of a currency and the forward or predetermined exchange rate of that currency at a specific date in the future. This is important in covered interest arbitrage because it allows investors to lock in a guaranteed rate of return by borrowing in one currency at a low interest rate, converting to another currency, investing in that currency at a higher interest rate, and then converting back to the original currency at the predetermined forward rate. The spot-forward differential plays a key role in the calculation of potential profits or losses in this strategy.

In the Context of Covered Interest Arbitrage,the Spot-Forward Differential Refers