Covered interest arbitrage from a U.S.dollar perspective when the euro futures price (expressed in $/€)is too high involves
A)buying foreign exchange futures contracts
B)selling interest rate futures contracts
C)lending funds in risk-free euro investment
D)selling euros
E)buying euro stock index ETFs

Question

Quizplus · Accepted Answer

Covered interest arbitrage involves taking a long position in a foreign currency and a short position in the domestic currency, while simultaneously investing in a risk-free asset denominated in the foreign currency. Therefore, the best choice from a U.S. dollar perspective when the euro futures price is too high would be to lend funds in a risk-free euro investment, which would earn a higher interest rate due to the elevated euro futures price. This would allow for a profit when the investment matures and the funds are converted back to U.S. dollars.

Covered Interest Arbitrage from a U