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If IRP is violated and forward is too cheap relative to theoretical, the arbitrage is to:
ABorrow foreign, convert spot, lend domestic, buy forward
BBorrow domestic, convert spot, lend foreign, sell forward
CHold currency in cash to wait out the deviation
DSell foreign-currency assets to crystallise loss
Answer & Solution
Correct answer: A. Borrow foreign, convert spot, lend domestic, buy forward
1. Identify what the question asks: this concept maps to irparbitrage (§8.1).
2. Apply the framework or formula relevant to the topic.
3. Eliminate distractors and arrive at the correct option (A).
_Source: ICAI BoS CA Final Paper 2, Ch 10 "Foreign Exchange Exposure and Risk Management"_
Related questions
SWIFT in foreign exchange refers to:Money-market hedge for a 1-year USD 1 million receivable: borrow USD at 4%, convert to INRAmerican quote of USD/INR vs European quote: a USD/INR of 83.20 (INR per USD) viewed as EuContinuous IRP: F = S · e^{(r_dom − r_for) T}. With S = 80, r_dom = 6%, r_for = 2%, T = 1,An exporter expects USD 1,00,000 in 60 days. To hedge transaction exposure most simply:Currency swap exchanges principal + interest cash flows in two currencies. Compared with FForward USD/INR 84.00, spot 83.00, time 3 months. Annualised forward premium (continuous-eUSD/INR bid = 83.10; ask = 83.20. Quoting USD/INR using INR/USD inversion gives bid ≈ 1/83