Which of the following is not true regarding interest rate parity (IRP)?
A)When interest rate parity holds, covered interest arbitrage is not possible.
B)When the interest rate in the foreign country is higher than that in the home country, the forward rate of that country's currency should exhibit a discount.
C)When the interest rate in the foreign country is lower than that in the home country, the forward rate of that country's currency should exhibit a premium.
D)When covered interest arbitrage is not feasible, interest rate parity must hold.
E)All of the above are true.

Question

Quizplus · Accepted Answer

This statement is incorrect. Interest rate parity can hold without the possibility of covered interest arbitrage, as other factors such as transaction costs or capital controls may prevent arbitrage opportunities. Choices A, B, and C are all true statements regarding interest rate parity.

Which of the Following Is Not True Regarding Interest Rate