If interest rate parity exists, the attempt to finance with a foreign currency while covering the position to avoid exchange rate risk will result in an effective financing rate that is ____ the domestic interest rate.
A) lower than
B) greater than
C) similar to
D) None of these are correct.

Question

Quizplus · Accepted Answer

Interest rate parity states that the difference between domestic and foreign interest rates should equal the expected change in exchange rates. Thus, if one tries to finance with a foreign currency while covering the position to avoid exchange rate risk, the effective financing rate should be similar to the domestic interest rate.

If Interest Rate Parity Exists, the Attempt to Finance with a Foreign