The Thai one-year interest rate is 10 percent, while the U.S. one-year interest rate is 4 percent. Assume that interest rate parity exists. If a U.S.-based MNC uses the forward rate to forecast the exchange rate of the Thai baht in one year, the expected effective yield from investing in a one-year deposit in Thailand is:

Question

Quizplus · Accepted Answer

Interest rate parity implies that the difference in interest rates between two countries is equal to the expected change in exchange rates between the countries' currencies. Therefore, if a U.S.-based MNC invests in Thailand, the expected yield, after considering the expected depreciation of the Thai baht against the U.S. dollar, would be the same as the domestic interest rate, which is 4 percent.

The Thai One-Year Interest Rate Is 10 Percent, While the U.S