Interest Rate Parity (IRP)is best defined as:
A) when a government brings its domestic interest rate in line with other major financial markets.
B) when the central bank of a country brings its domestic interest rate in line with its major trading partners.
C) a zero arbitrage condition that must hold when international financial markets are in equilibrium.
D) None of these

Question

Quizplus · Accepted Answer

Interest Rate Parity (IRP) is a zero arbitrage condition that must hold when international financial markets are in equilibrium. It implies that the difference between the forward exchange rate and the spot exchange rate should equal the difference in interest rates between two countries. This condition helps to ensure that there are no risk-free arbitrage opportunities available in the foreign exchange market, and that exchange rates are determined by economic fundamentals rather than speculative activity. Options A and B are incorrect because they do not fully capture the concept of IRP, which is not necessarily related to government or central bank policies.

Interest Rate Parity (IRP)is Best Defined As