Interest rate parity exists because

Question

Quizplus · Accepted Answer

Interest rate parity exists because there are investors who stand ready to engage in arbitrage. They take advantage of any differences in interest rates between two countries by buying the currency with the lower interest rate and investing in the currency with the higher interest rate. This ultimately equalizes the interest rates between the two countries. Central banks may play a role in ensuring currency stability, but they are not the sole reason for interest rate parity. Inflation rates and transaction costs may affect exchange rates, but they do not directly relate to interest rate parity.

Interest Rate Parity Exists Because