Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreign interest rate, the:
A) larger will be the forward discount of the foreign currency.
B) larger will be the forward premium of the foreign currency.
C) smaller will be the forward premium of the foreign currency.
D) smaller will be the forward discount of the foreign currency.

Question

Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreign interest rate, the:​
A) ​larger will be the forward discount of the foreign currency.
B) ​larger will be the forward premium of the foreign currency.
C) ​smaller will be the forward premium of the foreign currency.
D) ​smaller will be the forward discount of the foreign currency.

Quizplus · Accepted Answer

According to interest rate parity, if the US interest rate is higher than the foreign interest rate, then the foreign currency is expected to trade at a forward premium to compensate for the differential. The higher the differential, the larger the expected forward premium. Therefore, the correct answer is B.

Based on Interest Rate Parity, the Larger the Degree by Which