Interest rate parity theory states that the forward premium or discount should be equal and opposite in sign to the difference in the national interest rates for securities of the same maturity.

Question

Quizplus · Accepted Answer

This statement accurately describes the interest rate parity theory. The theory asserts that the difference in interest rates between two currencies should be reflected in the forward exchange rate between those currencies. If the interest rate differential is large, there should be a correspondingly large forward premium or discount to offset the expected gain or loss from investing in one currency versus the other.

Interest Rate Parity Theory States That the Forward Premium or Discount