Which of the following quotations best describes interest rate parity in action?
A)"The demand for the Canadian dollar has increased due to the recent increase in the Canadian interest rate."
B)"The market feeling is that the Canadian dollar is overvalued and will likely appreciate."
C)"The price of bananas is the same in Canada and the United States, adjusting for the exchange rate."
D)"The expected appreciation of the Canadian dollar is currently lowering demand for it."
E)none of the above

Question

Quizplus · Accepted Answer

Interest rate parity refers to the equalization of expected returns on investments across different currencies, taking into account exchange rates and interest rates. Option A describes how an increase in Canadian interest rates would result in an increase in demand for the Canadian dollar, demonstrating interest rate parity in action. The other options do not relate to interest rate parity.

Which of the Following Quotations Best Describes Interest Rate Parity