Assume That the Interest Rate on Borrowings in India Is

Multiple Choice

Assume that the interest rate on borrowings in India is 1 percent while the interest rate on bank deposits in a U.S. bank is 4 percent. Carlos, an active currency trader, borrows in Indian rupees, converts the money into U.S. dollars and deposits it in a U.S. bank. What is the speculative element of this carry trade?

A) There will be no adverse movement in exchange rates or interest rates.
B) Liquidity is the key factor in determining interest rates.
C) Increasing money supply will not drive inflation.
D) Spot exchange rates are more favorable than forward exchange rates.
E) Hedging insures a company against foreign exchange risks.