When the futures price is equal to the spot rate of a given currency, and the foreign country exhibits a higher interest rate than the U.S. interest rate, astute investors may attempt to simultaneously ____ the foreign currency, invest it in the foreign country, and ____ futures in the foreign currency.
A) buy; buy
B) sell; buy
C) buy; sell
D) buy ; buy

Question

Quizplus · Accepted Answer

If the futures price is equal to the spot rate of a given currency and the foreign country has a higher interest rate than the U.S., it may be advantageous to buy the foreign currency and invest it in the foreign country to earn a higher return. At the same time, by selling futures in the foreign currency, the investor can lock in the current exchange rate, and protect themselves against any potential depreciation of the foreign currency. This strategy is known as the carry trade. However, it is important to note that such investments involve risks and may not always result in profits.

When the Futures Price Is Equal to the Spot Rate