Based on the theory of interest rate parity, the percentage forward premium or discount is approximately equal to the difference in _______ interest rates.

Question

Quizplus · Accepted Answer

The theory of interest rate parity states that the percentage forward premium or discount in the exchange rate between two currencies is approximately equal to the difference in nominal risk-free interest rates between the two countries. Therefore, choice A is the best answer. Real interest rates and inflation-adjusted rates are not used in this calculation because they involve adjustments for inflation, which is not considered in the interest rate parity. Similarly, the term "risky" does not apply to risk-free interest rates.

Based on the Theory of Interest Rate Parity, the Percentage