Question

Due to ____, market forces should realign the cross exchange rate between two foreign currencies based on the spot exchange rates of the two currencies against the U.S. dollar.​A. forward realignment arbitrageB. triangular arbitrageC. covered interest arbitrageD. locational arbitrage

Answer 1

Answer:

The correct answer is C

Explanation:

Covered interest arbitrage (CIA), it is an strategy or tool of arbitrage trading, where the investor capitalizes on the rate of interest which is differential among two countries through using the forward contract for eliminate the exposure or cover to exchange the rate risk.

So, because of covered interest arbitrage, the market forces realign the cross exchange rate among two countries grounded on spot exchange rates of two currencies.