In order for an individual to be indifferent between holding foreign or domestic bonds,
A)the Marshall-Lerner condition must hold.
B)the foreign and domestic interest rates must be equal.
C)the expected rate of depreciation of the domestic currency is zero.
D)the interest parity condition must hold.

Question

Quizplus · Accepted Answer

The interest parity condition states that the expected return on domestic bonds must be equal to the expected return on foreign bonds adjusted for expected changes in the exchange rate. If this condition holds, an individual will be indifferent between holding foreign or domestic bonds since their expected return will be the same. Thus, option D is the correct answer. Options A, B, and C are not sufficient conditions for an individual to be indifferent between holding foreign or domestic bonds.

In Order for an Individual to Be Indifferent Between Holding