If interest rate parity holds,
A) covered interest arbitrage opportunities will exist.
B) covered interest arbitrage opportunities will not exist.
C) arbitragers will be able to make risk-free profits.
D) covered interest arbitrage opportunities will exist, and arbitragers will be able to make risk-free profits.
E) covered interest arbitrage opportunities will not exist, and arbitragers will be able to make risk-free profits.

Question

Quizplus · Accepted Answer

Interest rate parity ensures that the potential gains from covered interest arbitrage are eliminated due to the equalization of interest rates and forward exchange rates, thus preventing arbitrage opportunities.

If Interest Rate Parity Holds