If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:
A) U.S. investors could possibly benefit from covered interest arbitrage.
B) British investors could possibly benefit from covered interest arbitrage.
C) neither U.S. nor British investors could benefit from covered interest arbitrage.
D) A and B

Question

Quizplus · Accepted Answer

If the interest rate is lower in the U.S. than in the UK, it means that the USD is trading at a forward premium. If the forward rate of the British pound is the same as its spot rate, then there is no arbitrage opportunity for British investors. However, U.S. investors could possibly benefit from covered interest arbitrage by borrowing funds in the U.S. at a lower interest rate, converting them into British pounds, investing them in the UK at a higher interest rate, and then exchanging the pounds back into dollars at the predetermined forward rate. This would result in a profit for the U.S. investors.

If the Interest Rate Is Lower in the U