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) the difference will be quickly eliminated.

Question

Quizplus · Accepted Answer

Interest rate parity states that the difference in interest rates between two countries equals the difference between the forward and spot exchange rates. Therefore, if the difference between the forward and spot exchange rates is positive, interest rate parity would predict that the difference in interest rates between countries will be positive in order to achieve equilibrium.

If the Difference Between Forward and Spot Exchange Rates Is