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Statement is true for carry trade

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1. The two-month interest rates in Switzerland and the United Sates are 2% and 5% per annum, respectively, with continuous compounding. The spot price of the Swiss franc is $0.8000. If the delivery price for a two-month forward contract is $0.8100,

(a) it is too high, and there is a profitable carry trade on this forward contract.

(b) it is too high, and there is a profitable reverse carry trade on this forward contract.

(c) it is too low, and there is a profitable carry trade on this forward contract.

(d) it is too low, and there is a profitable reverse carry trade on this forward contract.

2. Which of the following statement is true for a carry trade?

(a) A carry trade consists of a long position in a forward and a short position in its underlying, and it generates an arbitrage profit if the delivery price in the forward contract is too high.

(b) A carry trade consists of a short position in a forward and a long position in its underlying, and it generates an arbitrage profit if the delivery price in the forward contract is too high.

(c) A carry trade consists of a long position in a forward and a short position in its underlying, and it generates an arbitrage profit if the delivery price in the forward contract is too low.

(d) A carry trade consists of a short position in a forward and a long position in its underlying, and it generates an arbitrage profit if the delivery price in the forward contract is too low.

Reference no: EM131974416

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