The theory that the annual percentage differential in the forward market for a currency quoted in terms of another currency is equal to the approximate difference in the interest rates between two countries is known as:
A) covered interest arbitrage.
B) the Fisher equation.
C) a forward rate agreement.
D) interest rate parity.

Question

Quizplus · Accepted Answer

This theory is known as interest rate parity. Covered interest arbitrage involves using forward contracts to cover exchange rate risk, the Fisher equation relates nominal and real interest rates, and a forward rate agreement is a personalized contract between two parties to exchange currencies at a future date.

The Theory That the Annual Percentage Differential in the Forward