diff --git a/__tests__/integration.js b/__tests__/integration.js
index faf6869138..eda727e896 100644
--- a/__tests__/integration.js
+++ b/__tests__/integration.js
@@ -560,3 +560,36 @@ test('yarn init -y', async () => {
   const manifestFile = await fs.readFile(path.join(cwd, 'package.json'));
   expect(manifestFile).toEqual(initialManifestFile);
 });
+
+test('--modules-folder option', async () => {
+  /**
+   * The behavior of --modules-folder (and other folder options) was that it resolved relative not to the current
+   * working directory, but instead to the closest project root (folder containing a package.json file).
+   *
+   * This behavior was at best surprising and could result in data loss. This test captures a scenario in which
+   * there would previously have been data loss, demonstrating the fix for --modules-folder and other folder options.
+   *
+   */
+  const projectFolder = await makeTemp();
+  const libraryFolder = path.join(projectFolder, 'lib');
+
+  const initialManifestFile = JSON.stringify({name: 'test', license: 'ISC', version: '1.0.0'});
+  const importantData = 'I definitely care about this file!';
+
+  await fs.writeFile(`${projectFolder}/package.json`, initialManifestFile);
+  await fs.writeFile(`${projectFolder}/IMPORTANT_FILE.txt`, importantData);
+  await fs.mkdirp(libraryFolder);
+
+  const options = {cwd: libraryFolder};
+
+  // This yarn command fails with the previous behavior, the rest of the test is defense in depth
+  await runYarn(['add', 'left-pad', '--modules-folder', '.'], options);
+
+  // Dependencies should have been installed in the 'lib' folder
+  const libraryFolderContents = await fs.readdir(`${libraryFolder}`);
+  expect(libraryFolderContents).toContain('left-pad');
+
+  // Additionally, there should have not been any data loss in the project folder
+  const importantFile = await fs.readFile(`${projectFolder}/IMPORTANT_FILE.txt`);
+  expect(importantFile).toBe(importantData);
+});
diff --git a/src/cli/index.js b/src/cli/index.js
index 29ed981060..58103360b2 100644
--- a/src/cli/index.js
+++ b/src/cli/index.js
@@ -509,21 +509,26 @@ export async function main({
 
   const cwd = command.shouldRunInCurrentCwd ? commander.cwd : findProjectRoot(commander.cwd);
 
+  const folderOptionKeys = ['linkFolder', 'globalFolder', 'preferredCacheFolder', 'cacheFolder', 'modulesFolder'];
+
+  // Resolve all folder options relative to cwd
+  const resolvedFolderOptions = {};
+  folderOptionKeys.forEach(folderOptionKey => {
+    const folderOption = commander[folderOptionKey];
+    const resolvedFolderOption = folderOption ? path.resolve(commander.cwd, folderOption) : folderOption;
+    resolvedFolderOptions[folderOptionKey] = resolvedFolderOption;
+  });
+
   await config
     .init({
       cwd,
       commandName,
-
+      ...resolvedFolderOptions,
       enablePnp: commander.pnp,
       disablePnp: commander.disablePnp,
       enableDefaultRc: commander.defaultRc,
       extraneousYarnrcFiles: commander.useYarnrc,
       binLinks: commander.binLinks,
-      modulesFolder: commander.modulesFolder,
-      linkFolder: commander.linkFolder,
-      globalFolder: commander.globalFolder,
-      preferredCacheFolder: commander.preferredCacheFolder,
-      cacheFolder: commander.cacheFolder,
       preferOffline: commander.preferOffline,
       captureHar: commander.har,
       ignorePlatform: commander.ignorePlatform,