If the net foreign return is lower than the domestic interest rate then:

Question

Quizplus · Accepted Answer

When the net foreign return is lower than the domestic interest rate, it implies that investors would prefer to invest domestically rather than abroad. To maintain equilibrium and prevent massive capital flows towards the domestic market, the interest parity condition suggests that the forward rate must adjust to compensate for the interest rate differential. Therefore, the interest parity forward rate would be higher than the actual forward rate to discourage domestic investments and encourage foreign investments, balancing the returns after considering the expected changes in exchange rates.

If the Net Foreign Return Is Lower Than the Domestic