Question

Consider a foreign currency trading at a forward discount to the home currency. Covered interest arbitrage is feasible if the difference between the home currency short term interest rate and the foreign short term interest rate does not equal the forward discount.

Question 8 options: a) True b) False

Answer 1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

As per Interest rate parity:

As per Interest rate parity the difference in spot fate and forward rate exits due to differences in interest rate between two countries.

F/S = (1+ra)/(1+rb)
F= forward rate
S = spot rate.
ra = interest rate of price currency.
rb= interest rate of base currency.

Approximate Relationship:
F-S = ra-rb.

If the above equation does not hold good then there is a chance of Arbitrage.

Answer: True.