According to interest rate parity, if the interest rate in a foreign country is ____ than in the home country, the forward rate of the foreign currency will have a ____.
A)higher; discount
B)lower; premium
C)higher; premium
D)higher; discount AND lower; premium

Question

Quizplus · Accepted Answer

Interest rate parity theory suggests that the difference in interest rates between two countries will be offset by changes in the forward exchange rate between their currencies. If the foreign interest rate is higher than the home country's, the foreign currency is expected to depreciate in the future, leading to a forward discount. Conversely, if the foreign interest rate is lower, the foreign currency is expected to appreciate, leading to a forward premium.

According to Interest Rate Parity, If the Interest Rate in a Foreign