Question

Covered interest arbitrage involves both Group of answer choices the purchase of a domestic asset and a spot contract in the market for foreign exchange. the sale of a foreign asset and the purchase of a forward contract in the market for foreign exchange. the purchase of a foreign asset and a forward contract in the market for foreign exchange. the sale of domestic stocks and the purchase of foreign bonds.

Answer 1

Answer:

the purchase of a foreign asset and a forward contract in the market for foreign exchange.

Explanation:

An arbitrage is a type of trade that is caused as a result of market inefficiency.

For example, if a stock is trading at $50 on the London Stock Exchange (LSE) while it is trading for $52 on the New York Stock Exchange (NYSE) at the same time. Philip buys the stock on the LSE and sells the same shares immediately on the NYSE and earns a profit of $2 per share, this is referred to as an arbitrage.

This ultimately implies that, arbitrage allows an individual to profit from the price difference between similar goods, commodity, securities or currency in different markets.

A covered interest arbitrage can be defined as trading strategy in which an investor minimizes his or her currency risk by using a forward contract to hedge against the interest rate difference between two countries i.e the exchange rate risk. Thus, it's considered to be the most common interest rate arbitrage around the world.

Hence, a covered interest arbitrage involves both the purchase of a foreign asset and a forward contract in the market for foreign exchange.