Result from the act of this covered interest arbitrage

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Reference no: EM132005905

1. In the Sweden Stock market, Volvo stock closed at Swedish Krona 30 per share. On the same day, the Swedish Krona to the U.S. dollar spot exchange rate was Swedish Krona 7.85/$1.00. Volvo trades as an ADR in the OTC market in the United States. Two underlying Volvo shares are packaged into one ADR. The no-arbitrage U.S. price of one ADR is

$18.23.

$7.64.

$1,234.50.

$471.00.

2. Assume that the U.S. investors are benefiting from covered interest arbitrage due to high interest rates on Canadian dollars. Which of the following forces should result from the act of this covered interest arbitrage? (Hint:Think how US investors will implement covered interest arbitrage.)

-downward pressure on the Canadian dollar's spot rate, and upward pressure on the Canadian dollar's forward rate.

-upward pressure on the Canadian dollar's spot rate, and downward pressure on the Canadian dollar's forward rate.

-upward pressure on the Canadian dollar's spot rate, and upward pressure on the Canadian dollar's forward rate.

- downward pressure on the Canadian dollar's spot rate, and downward pressure on the Canadian dollar's forward rate.

Reference no: EM132005905

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