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 6 percent. John, an active currency trader, borrows in Japanese yen, converts the money into U. S. dollars and deposits it in a U. S. bank. The speculative element of John's carry trade is that its success is based upon his belief that

Multiple Choice

there will be no adverse movement in exchange rates or interest rates.

liquidity is the key factor in determining interest rates.

increasing money supply will not drive inflation.

hedging insures a company against foreign exchange risks.

spot exchange rates are more favorable than forward exchange rates.