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      Question

      Covered Interest Arbitrage

      involves:
      A Borrowing in domestic currency Correct Answer Incorrect Answer
      B Converting to foreign currency Correct Answer Incorrect Answer
      C Investing abroad and covering with forward contract Correct Answer Incorrect Answer
      D All of the above Correct Answer Incorrect Answer

      Solution

      Covered interest arbitrage: Borrow domestic β†’ Convert to foreign β†’ Invest abroad β†’ Sell forward foreign currency β†’ Repay domestic loan β†’ Profit from interest differential after covering exchange risk.

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