Assume that the interest parity holds and that the dollar is expected to appreciate against the pound.Given this information,we know that
A)U)S. and U.K. interest rates are equal.
B)the U.S. interest rate exceeds the U.K. interest rate.
C)the U.K. interest rate exceeds the U.S. interest rate.
D)individuals will prefer to hold U.S. bonds because the U.S. interest rate exceeds the U.K. interest rate.
E) none of the above

Question

Quizplus · Accepted Answer

If the dollar is expected to appreciate against the pound and interest parity holds, it implies that the forward exchange rate between the two currencies will be such that the expected return on depositing funds in each currency is equal. In this case, the higher expected return will be available in the UK, i.e., the UK interest rate exceeds the US interest rate, as investors will demand a higher return to compensate for the expected depreciation of the pound. Therefore, choice C is the correct answer. Choices A, B, and D are incorrect as they do not follow from the given information.

Assume That the Interest Parity Holds and That the Dollar