With perfect capital mobility uncovered interest parity always holds because:
A)almost unlimited flows of capital can occur if there is any deviation from the parity.
B)lower domestic interest rates trigger hedging to avoid exchange rate risks.
C)capital flows out at a much faster rate than it flows in if the interest rate changes.
D)the no-arbitrage condition cannot be satisfied without using forward contract.

Question

Quizplus · Accepted Answer

With perfect capital mobility, investors can freely move their capital across borders to take advantage of any deviations from uncovered interest parity. This arbitrage process ensures that the parity always holds in the long run.

With Perfect Capital Mobility Uncovered Interest Parity Always Holds Because