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. If interest rate parity holds, covered interest arbitrage opportunities will not exist.

Question

Quizplus · Accepted Answer

If interest rate parity holds, it implies that the forward exchange rate correctly reflects the interest rate differential between two currencies. In such a scenario, there would be no arbitrage opportunities available, and covered interest arbitrage opportunities would not exist. Hence, choice B is the correct answer.

If Interest Rate Parity Holds