Which of the following is not true regarding interest rate parity (IRP)?
A) When interest rate parity holds, covered interest arbitrage is not possible.
B) When the interest rate in the foreign country is higher than that in the home country, the forward rate of that country's currency should exhibit a discount.
C) When the interest rate in the foreign country is lower than that in the home country, the forward rate of that country's currency should exhibit a premium.
D) When covered interest arbitrage is not feasible, interest rate parity must hold.
E) All of these are true.

Question

Quizplus · Accepted Answer

Covered interest arbitrage is only feasible when interest rate parity does not hold. When it is feasible, market participants will immediately take advantage of the arbitrage opportunity, which would then restore interest rate parity. Therefore, if covered interest arbitrage cannot be executed, it must be because interest rate parity holds. A, B, and C are true statements regarding interest rate parity.

Which of the Following Is Not True Regarding Interest Rate