The Interest Rate Parity Theorem states that:
A) Interest rates in different currencies will tend to move into line with each other over time
B) Interest rates in different currencies differ due to differences in expectations about inflation
C) Selling a low interest rate currency to invest a high interest rate currency will only be profitable if one hedges the currency risk
D) Selling a low interest rate currency to invest in a high interest rate currency should not be profitable if one hedges the currency risk

Question

Quizplus · Accepted Answer

Interest Rate Parity (IRP) suggests that the difference in interest rates between two countries is equal to the expected change in exchange rates between the countries' currencies, meaning hedging should eliminate arbitrage opportunities.

The Interest Rate Parity Theorem States That