Assuming Covered Interest Parity holds, a(n) ________ in the domestic interest rate will ________ the forward rate, all other things held constant.

Question

Quizplus · Accepted Answer

According to Covered Interest Parity, if the domestic interest rate increases, the forward rate should decrease to maintain equilibrium. This is because an increase in the domestic interest rate will lead to an increase in demand for the domestic currency, which will in turn lead to an appreciation of the currency. To prevent this appreciation, the forward rate must decrease. Therefore, option B is the correct choice.

Assuming Covered Interest Parity Holds, A(n) ________ in the Domestic