Assume that the interest rate in the home country of Currency X is much higher than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X:
A)should exhibit a discount.
B)should exhibit a premium.
C)should be zero (i.e., it should equal its spot rate).
D)B or C

Question

Assume that the interest rate in the home country of Currency X is much higher than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X:​
A)should exhibit a discount.
B)should exhibit a premium.
C)should be zero (i.e., it should equal its spot rate).
D)B or C

Quizplus · Accepted Answer

According to the interest rate parity, when the interest rate in the home country is higher than in the foreign country, the forward rate of the currency will exhibit a discount. This is because investors will demand a higher return for investing in the foreign currency, which would drive down the forward rate of the currency. Therefore, the best choice is A, which states that the forward rate of Currency X should exhibit a discount.

Assume That the Interest Rate in the Home Country of Currency