Question
If a currency futures contract (direct quote) is priced below the price implied by Covered Interest Parity (CIP), arbitrageurs could take advantage of the mispricing
If a currency futures contract (direct quote) is priced below the price implied by Covered Interest Parity (CIP), arbitrageurs could take advantage of the mispricing by simultaneously
A-going short in the futures contract, borrowing in the domestic currency, and going long in the foreign currency in the spot market | |
B-going short in the futures contract, lending in the domestic currency, and going long in the foreign currency in the spot market | |
C-going long in the futures contract, borrowing in the domestic currency, and going short in the foreign currency in the spot market | |
D-going long in the futures contract, borrowing in the foreign currency, and going long in the domestic currency, investing the proceeds at the local rate of interest |
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