To capitalize on high foreign interest rates using covered interest arbitrage, a U.S. investor would convert dollars to the foreign currency, invest in the foreign country, and simultaneously sell the foreign currency forward.

Question

Quizplus · Accepted Answer

This statement accurately describes the process of covered interest arbitrage for capitalizing on high foreign interest rates. By investing in a foreign country using the converted currency, the investor can earn a higher return, but also hedges against exchange rate risk by selling the foreign currency forward. This ensures a known exchange rate when converting the foreign currency back to dollars in the future.

To Capitalize on High Foreign Interest Rates Using Covered Interest