Assume that interest rate parity holds. The Mexican interest rate is 50%, and the U.S. interest rate is 8%. Subsequently, the U.S. interest rate decreases to 7%. According to interest rate parity, the peso's forward ____ will ____.
A) premium; increase
B) discount; decrease
C) discount; increase
D) premium; decrease

Question

Quizplus · Accepted Answer

According to interest rate parity, if the U.S. interest rate decreases, the interest rate differential between Mexico and the U.S. increases, leading to an increase in the peso's forward discount.

Assume That Interest Rate Parity Holds