Question

Assume that interest rate parity does not hold, and Japanese investors are benefiting from covered interest arbitrage due to high interest rates in the U.S. Which of the following forces should result from this covered interest arbitrage activity? a. downward pressure on the yen's forward rate b. downward pressure on the yen's interest rate c. downward pressure on the yen's spot rate d. upward pressure on the U.S. interest rate

Answer 1

Answer:

c. downward pressure on the yen's spot rate

Explanation:

When a currency crisis takes place, it is because there is a strong drop in the value of a nation's currency. At the same time, this drop in value harms the economy since it gives place to unstableness in exchange rates, indicating that one unit of a determined currency is not useful to buy the same amount of another as in the past. This causes downward pressure on the spot rate of the most valuable currency.