Question

M EST nent: Ch 7 HW maifn3h.ch07.24 o The following is a graphical representation of the interest rate parity (IRP) line Forward discount (%) Forward premium (%) The dashed line is the IRP line. Which of the following is not true (assume that there are no market imperfections)? ○ a, Any point lying to the left ofthe IRP line represent covered iterst atitrage opportuntes for foreign investors. b. Any point lying to the right of the IRP line represent covered interest arbitrage opportunities for home country investors c. Any point Iying to the left of the IRP ine represent covered interest arbitrage opportunities for home country investors d. Any point tying on the IRP line represent interest rate parity esc 2 3 4 5 6

Answer 1

The statement which is not true is :

Any point lying to the left of IRP line represent covered interest arbritage opportunities for home country investors.

This statement is false because any point lying to the left of IRP line represent covered interest arbritage opportunities for foreign investors. Covered interest arbritage opportunities for home country investors are represented by any point to the right of the IRP line. For any points along the IRP line covered interest arbritage is not possible.