14-31 Interest rate parity implies that the discounted spread between interest rates in two currencies should equal the percentage spread between forward and spot exchange rates.

Question

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Interest rate parity is the concept that the difference in interest rates between two countries should be equal to the difference between the forward and spot exchange rates. This implies that if the forward exchange rate is higher than the spot exchange rate, it would offset the difference in interest rates. In other words, if there is a higher interest rate in one country compared to another, the forward exchange rate for that currency should be higher as well. Therefore, interest rate parity implies that the discounted spread between interest rates in two currencies should equal the percentage spread between forward and spot exchange rates.

14-31 Interest Rate Parity Implies That the Discounted Spread Between