Assume that British interest rates are higher than U.S. rates, and that the spot rate equals the forward rate. Covered interest arbitrage puts ____ pressure on the pound's spot rate, and ____ pressure on the pound's forward rate.
A) downward; downward
B) downward; upward
C) upward; downward
D) upward; upward

Question

Quizplus · Accepted Answer

Covered interest arbitrage involves borrowing in the currency with lower interest rates (USD) and investing in the currency with higher interest rates (GBP). This increases demand for the pound in the spot market, putting upward pressure on the pound's spot rate. Simultaneously, it increases the supply of pounds in the forward market, putting downward pressure on the pound's forward rate.

Assume That British Interest Rates Are Higher Than U