SHOW WORK & ANSWER

1. Which of the following transactions describes a covered interest arbitrage?

Sell a US bond and offset the position with the purchase of currency futures

Invest in a higher yielding foreign bond and at the same time use a forward currency contract to lock in the yield

Buy a higher yielding foreign bond and offset the position by selling the corresponding lower yielding US bond

Borrow at a lower interest rate in the US and use the proceeds to buy foreign currency forward contract

2. Since the terms of the forward contract are well known before the facts, would a covered interest arbitrage offer a more superior investment outcome than investing in U.S. securities? Ignore transaction costs and taxes.

No, because interest rate parity does not hold

Yes, because the future value of the foreign investment is greater after currency conversion

Yes, because interest rate parity would prevail

No, because the future value of the domestic investment is greater

None of the above

3. Which of the following strategies would be most profitable if you expect the dollar to depreciate against the South African rand?

		Invest your funds in S.A.
		Keep your funds in the U.S.
		Execute a covered interest arbitrage at the current forward rate
		None of the above