Assume that the interest rate in the home country of Currency X is much higher than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X:
A) should exhibit a discount
B) should exhibit a premium
C) should be zero (i.e., it should equal its spot rate)
D) should exhibit a premium or should be zero (i.e., it should equal its spot rate)

Question

Quizplus · Accepted Answer

Interest rate parity suggests that the currency of the country with a higher interest rate will trade at a discount in the forward market compared to the spot market. This compensates for the higher interest income that could be earned by holding the higher-yielding currency.

Assume That the Interest Rate in the Home Country of Currency