If investors can cover themselves in the forward market, they will take advantage of interest rate differentials by:
A) buying assets (lending) denominated in the high-interest rate currency, and selling assets (borrowing) in the low-interest rate currency.
B) removing funds from both investments.
C) turning over their investment portfolio to an expert in one of the two nations.
D) selling assets denominated in high-interest rate currency and buying assets in the low-interest rate currency.

Question

Quizplus · Accepted Answer

By buying assets (lending) denominated in the high-interest rate currency and selling assets (borrowing) in the low-interest rate currency, investors can take advantage of interest rate differentials and ensure their investments are covered in the forward market. This is known as a carry trade. Option B does not make sense as removing funds from both investments would mean the investor is not making any profit. Option C is not relevant as the question does not mention the involvement of an investment expert. Option D would result in losses for the investor as they would be selling assets in the high-interest rate currency and buying assets in the low-interest rate currency, resulting in a net loss.

If Investors Can Cover Themselves in the Forward Market, They