If interest rate parity holds between two countries then it must be true that:

Question

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Interest rate parity is a theory that states that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate. This implies that the exchange rate adjusts to keep purchasing power constant across the two currencies. Option A is incorrect because interest rates can be different between the two countries, but the differential will be reflected in the exchange rates. Option B is incorrect because interest rate parity suggests that there are no arbitrage opportunities due to interest rate differentials. Option D is incorrect because interest rate parity does not make any predictions about future exchange rates or their unbiasedness.

If Interest Rate Parity Holds Between Two Countries Then It