Domestic currency financing is more desirable to foreign currency financing when:

Question

Quizplus · Accepted Answer

CA) When Covered Interest Parity (CIP) is violated such that the forward spread is larger than the interest differential, it implies that domestic currency financing is cheaper after accounting for the cost of hedging, making it more desirable.C) When Uncovered Interest Parity (UIP) is violated such that the expected change in the spot rate is smaller than the interest differential, it suggests that the cost of borrowing in foreign currency, when adjusted for expected depreciation or appreciation, is higher than borrowing in domestic currency, making domestic currency financing more attractive.

Domestic Currency Financing Is More Desirable to Foreign Currency Financing