The difference in interest rates between countries is believed to be equal to the expected change in spot exchange rates.

Question

Quizplus · Accepted Answer

This statement is known as the Interest Rate Parity theory, which states that the difference in interest rates between two countries should be equal to the difference between their expected spot exchange rates. This theory assumes that there are no barriers to capital flows, and therefore, investors will earn equal returns on investments regardless of the country they invest in.

The Difference in Interest Rates Between Countries Is Believed to Be