Which of the following statements best describes the interest rate parity theorem (IRPT)?
A)The IRPT is a proposition stating that the nominal spread between domestic and foreign interest rates equals the percentage spread between forward and spot exchange rates.
B)The IRPT is a proposition stating that the nominal spread between domestic and foreign currency rates equals the percentage spread between forward and spot exchange rates.
C)The IRPT is a proposition stating that the discounted spread between domestic and foreign currency rates equals the percentage spread between forward and spot exchange rates.
D)The IRPT is a proposition stating that the discounted spread between domestic and foreign interest rates equals the percentage spread between forward and spot exchange rates.

Question

Quizplus · Accepted Answer

The interest rate parity theorem (IRPT) states that the difference in interest rates between two countries is equal to the difference between the forward and spot exchange rates. This theorem helps to explain why exchange rates between countries change over time. Choice A states "nominal spread between domestic and foreign interest rates," which is not accurate. Choice B states "nominal spread between domestic and foreign currency rates," which is not accurate. Choice C states "discounted spread between domestic and foreign currency rates," which is not accurate.

Which of the Following Statements Best Describes the Interest Rate