Assume that the interest rate in the home country of Currency X is a much higher interest rate than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X:
A) should exhibit a discount.
B) should exhibit a premium.
C) should be zero (i.e., it should equal its spot rate).
D) B or C

Question

Quizplus · Accepted Answer

According to interest rate parity, if the home country's interest rate is higher than the U.S. interest rate, the forward rate of Currency X should exhibit a discount to offset the interest rate differential.

Assume That the Interest Rate in the Home Country of Currency