The short-term interest rate differential between two countries is a good indicator of the forward premium on the currencies, but not the forward discount.

Question

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The short-term interest rate differential between two countries is a good indicator of both the forward premium and the forward discount on the currencies. According to the interest rate parity theory, the difference in interest rates between two countries will be equal to the differential between the forward exchange rate and the spot exchange rate, indicating both premiums and discounts.

The Short-Term Interest Rate Differential Between Two Countries Is a Good