Although IRP tends to hold, it may not hold precisely all the time

Question

Quizplus · Accepted Answer

Both options (a) and (c) are potential reasons why the interest rate parity (IRP) may not hold precisely all the time. Transaction costs, such as bid-ask spreads, can impact exchange rates and interest rates and create discrepancies from IRP. Capital controls imposed by governments can limit or restrict the movement of capital across borders, which can also create deviations from IRP. Asymmetric information is also a potential factor that can impact exchange rates and interest rates, but it is not directly related to IRP. Therefore, option D is the best choice.

Although IRP Tends to Hold, It May Not Hold Precisely