Question

Which of the following statements are not true?

a. 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.

b. Technology enables more consistent prices among banks and reduces the likelihood of significant discrepancies in foreign exchange quotations among locations.

c. Locational arbitrage explains why prices among banks at different locations will not normally differ by a significant amount.

d. All of the above statements are true

Answer 1

The statement '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' is not true.

Step-by-step explanation:

The statement a. 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. is not true. Covered interest arbitrage involves taking advantage of the interest rate differentials between two countries by borrowing in one country with a lower interest rate and investing in another country with a higher interest rate, while simultaneously entering into a forward contract to sell the foreign currency acquired at a future date.

On the other hand, statements b, c, and d are all true. Technology has indeed enabled more consistent prices among banks and reduced the likelihood of significant discrepancies in foreign exchange quotations among locations, which is known as locational arbitrage. Therefore, the correct answer is option a.