Which one of the following states that the difference in interest rates between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate?

Question

Quizplus · Accepted Answer

This statement describes the Interest rate parity theory. According to this theory, interest rate differentials between two countries are equal to the difference between the forward exchange rate and the spot exchange rate. This equilibrium condition ensures that investors do not have any arbitrage opportunities by borrowing funds in a low-interest rate country and investing in a higher interest rate country. Therefore, Choice D, Interest rate parity, is the correct answer.

Which One of the Following States That the Difference in Interest