Perfect capital mobility between countries implies that:
A) the covered interest parity holds
B) the interest rate on domestic bonds equals to the interest rate on similar foreign bond plus the forward premium on foreign exchange.
C) The actual portfolio composition adjusts instantaneously to desired portfolio composition.
D) All of the above are correct.

Question

Quizplus · Accepted Answer

All of the given statements are correct under the assumption of perfect capital mobility between countries. Covered interest parity holds in such a scenario, the interest rate on domestic bonds is equal to the interest rate on similar foreign bonds plus the forward premium on foreign exchange, and the actual portfolio composition adjusts instantaneously to the desired portfolio composition.

Perfect Capital Mobility Between Countries Implies That