Question
Throughout the 1990s, interest rates in GermanyGermany were lower than interest rates in RussiaRussia. As a result, many GermanGerman investors were tempted to borrow in
Throughout the 1990s, interest rates in GermanyGermany were lower than interest rates in RussiaRussia. As a result, many GermanGerman investors were tempted to borrow in GermanyGermany and invest the proceeds in RussiaRussia. Which of the following explains why this strategy does not represent an abritrage opportunity? (Select the best choice below.)
A. Other things besides money enter the picture. By investing overseas GermanyGermany looks weak and so this is regarded as an unpatriotic act. When the cost of appearing unpatriotic is taken into account, the profits are erased.
B. It is an arbitrage opportunity.
C. Most GermanGerman investors were prohibited by law from taking advantage of this opportunity.
D. Engaging in such transactions may incur a loss if the value of the Russian roubleRussian rouble falls relative to the German markGerman mark. Because a profit is not guaranteed, this strategy is not an arbitrage opportunity.
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