Which one of the following appears to be a safe assumption when there is no difference between the forward and spot exchange rates between two currencies?
A) The countries have equal nominal interest rates.
B) The spot rate is expected to change.
C) Expected inflation is less than the nominal rate.
D) Both currencies are selling at a premium relative to the other.

Question

Quizplus · Accepted Answer

When there is no difference between the forward and spot exchange rates between two currencies, it is safe to assume that the countries have equal nominal interest rates. This is known as interest rate parity, where the difference in the interest rates between two countries is equal to the difference in the exchange rates between their currencies.

Which One of the Following Appears to Be a Safe