Question

If u.s. firms attempt to use covered interest arbitrage to capitalize on the high argentine peso interest rate, what forces should occur?

Answer 1

The answer is: Downward pressure on the Argentine peso's forward rate

Step-by-step explanation:

Forward rates are interest rates applicable to financial transactions that will happen in the future.

Currently the Argentine peso is yielding a high interest rate. If American firms try to benefit from this by investing in financial transactions involving Argentine pesos, they will eventually put downward pressure to reduce Argentine peso's forward rate. As the demand for Argentine pesos increase, they will yield lower interest rates.