If the difference between forward and spot exchange rates is positive, interest rate parity would predict that:
A) the difference in interest rates between countries will be negative.
B) the difference in interest rates between countries will be positive.
C) there will be no difference in interest rates between countries.
D)any difference in interest rates between countries will be quickly eliminated.

Question

Quizplus · Accepted Answer

Interest rate parity states that the difference in interest rates between two countries should be equal to the difference between their forward and spot exchange rates. If the difference between forward and spot exchange rates is positive, then according to interest rate parity, the difference in interest rates between the two countries should also be positive. Therefore, the best choice is B, which states that the difference in interest rates between countries will be positive.

If the Difference Between Forward and Spot Exchange Rates Is