Adjusted for risk, interest rate parity
A) always holds.
B) holds only between the U.S. and Canada.
C) holds only for larger countries.
D) holds only when purchasing parity holds.

Question

Quizplus · Accepted Answer

Interest rate parity holds when the return on two currencies, adjusted for the risk, is equal. This concept holds true for all countries and currencies, making option A the correct choice. Option B is incorrect because interest rate parity holds true for all countries, not just the US and Canada. Option C is incorrect because the principle of interest rate parity is not limited by country size. Option D is incorrect because interest rate parity is a separate concept from purchasing parity.

Adjusted for Risk, Interest Rate Parity