A ________ strategy replicates the forward contract by borrowing in one currency,converting to the other currency,and investing in the new currency.

Question

Quizplus · Accepted Answer

A cash-and-carry strategy involves borrowing in one currency, converting it into another currency, and investing in that new currency. This replicates the payoff of a forward contract, but with the added benefit of earning interest on the invested funds. The profit from this strategy comes from the difference in interest rates between the two currencies. Thus, A is the correct choice. The other options, such as futures or foreign investment, involve different strategies for managing currency risk.

A ________ Strategy Replicates the Forward Contract by Borrowing in One