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 buying an asset in the spot market, and simultaneously selling a futures contract on the same asset, with the intention of making a profit from the difference in price between the spot and futures markets. In FX markets, a cash-and-carry strategy would involve borrowing in one currency, converting to the other currency and investing in the new currency in the hope of profiting from the interest rate differential between the two currencies. This replicates the payoff of a forward contract.

A ________ Strategy Replicates the Forward Contract by Borrowing in One