The theory of ________ states that the difference in the national interest rates for securities of similar risk and maturity should be equal to but opposite in sign to the forward rate discount or premium for the foreign currency, except for transaction costs.

Question

Quizplus · Accepted Answer

The theory described in the question is known as the interest rate parity. The international Fisher Effect describes the relationship between expected changes in exchange rates and nominal interest rate differentials. Absolute PPP states that the price of a basket of goods should be the same across different countries once adjusted for exchange rates. The law of one price states that identical goods should have the same price in different markets after accounting for transportation and transaction costs.

The Theory of ________ States That the Difference in the National