If the foreign interest rate is 15%, the current exchange rate is 10.0 and the expected future exchange rate is 11.0, what is the domestic interest rate according to the interest parity condition?
A) 5%
B) 14%
C) 25%
D) none of the above

Question

Quizplus · Accepted Answer

The interest parity condition states that the domestic interest rate (r) is equal to the foreign interest rate (i) plus the expected change in the exchange rate (e). In this case, the foreign interest rate is 15%, the current exchange rate is 10.0, and the expected future exchange rate is 11.0. Therefore, the expected change in the exchange rate is 11.0 - 10.0 = 1.0. Substituting these values into the interest parity condition, we get:r = i + er = 15% + 1.0r = 16%Therefore, the domestic interest rate is 16%.

If the Foreign Interest Rate Is 15%, the Current Exchange