Assume that the interest parity condition holds and that the Australian dollar is expected to appreciate against the pound. Given this information, we know that:
A) the Australian interest rate exceeds the U.K. interest rate.
B) individuals will prefer to hold the U.K. bonds because the U.K. interest rate exceeds the Australian interest rate.
C) individuals will prefer to hold Australian bonds because the Australian interest rate exceeds the U.K. interest rate.
D) the Australian and European interest rates are equal.
E) the U.K. interest rate exceeds the Australian interest rate.

Question

Quizplus · Accepted Answer

If the Australian dollar is expected to appreciate against the pound, the interest rate in the U.K. must be higher than in Australia to compensate investors for the expected loss in currency value. This is in line with the interest rate parity condition, which states that the difference in interest rates between two countries is equal to the expected change in exchange rates between the countries' currencies.

Assume That the Interest Parity Condition Holds and That the Australian