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

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Business

Curtis Briggs

25 August, 00:48

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

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Mathew Young · Answer 1

The statement is: True.

Explanation:

Covered Interest Arbitrage is a trading strategy which investors use to try to take advantage of the differences in interest rates in two currencies. A Forward Currency Contract is used by the Covered Interest Arbitrageur so that they know what exchange rate they will receive when converting their investment back into their original currency.

For example, the interest rate in the Eurozone might be 5% per year, while the interest rate in the U. S. is 3% per year. An American investor with $1,000 in the U. S. would earn $1,030 given a year, while in the Eurozone the investor exchanges the $1,000 which is EUR 915 and earns EUR 960 during the same year. Then, the American investor exchanges back his money into dollars resulting in $1050.