when interest rate parity (irp) does not hold a. there is usually a high degree of inflation in at least one country. b. the financial markets are in equilibrium. c. there are opportunities for covered interest arbitrage. d. both b and c

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19-12-2022
Business

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when interest rate parity (irp) does not hold a. there is usually a high degree of inflation in at least one country. b. the financial markets are in equilibrium. c. there are opportunities for covered interest arbitrage. d. both b and c

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Tutorconsortium704 Tutorconsortium704 · Answer 1 · 2022-12-23T23:35:37-05:00

The interest rate parity (irp) does not hold there are opportunities for covered interest arbitrage.

The concept of covered interest arbitrage—hence the name arbitrage—can only be achieved if the cost of hedging the exchange risk is lower than the additional return produced by investing in a higher-yielding currency. Uncovered interest arbitrage could be used as a contrast.

What are covered interest arbitrage's potential risks?

The foreign exchange markets are dangerous since there is a lack of uniform regulation and tax agreements. Indeed, some economists claim that until transaction costs can be reduced to below-market levels, covered interest rate arbitrage is no longer profitable.

Any time a stock, commodity, or piece of currency can be bought at one price on one market and simultaneously sold at a greater price on another, arbitrage can be used. The circumstance offers the trader the chance to benefit without taking any risks.

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