Covered interest arbitrage involves both
A)the purchase of a foreign asset and a forward contract in the market for foreign exchange.
B)the purchase of a domestic asset and a spot contract in the market for foreign exchange.
C)the sale of a foreign asset and the purchase of a forward contract in the market for foreign exchange.
D)the sale of domestic stocks and the purchase of foreign bonds.

Question

Quizplus · Accepted Answer

Covered interest arbitrage involves borrowing money in one currency, converting it to another currency to invest in an asset denominated in that currency, and simultaneously entering into a forward contract to sell the proceeds of that investment at a future date at a pre-determined exchange rate. Therefore, the correct choice is A, which involves purchasing a foreign asset and a forward contract in the market for foreign exchange.

Covered Interest Arbitrage Involves Both