The interest rate on euros is 8 percent. The interest rate in the United States is 5 percent. The euro's forward rate should exhibit a premium of about 3 percent.

Question

Quizplus · Accepted Answer

According to the interest rate parity theory, if the interest rate in the Eurozone is higher than in the United States, the euro is expected to depreciate against the dollar in the forward market, not trade at a premium. This is because investors will seek the higher interest rates in the Eurozone, leading to an initial appreciation of the euro, but expect it to depreciate in the future due to the interest rate differential.

The Interest Rate on Euros Is 8 Percent