Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreign interest rate, the:
A) larger will be the forward discount of the foreign currency.
B) larger will be the forward premium of the foreign currency.
C) smaller will be the forward premium of the foreign currency.
D) smaller will be the forward discount of the foreign currency.

Question

Quizplus · Accepted Answer

According to interest rate parity, the larger the difference between U.S. and foreign interest rates, the larger will be the forward premium of the foreign currency. This is because the currency with the lower interest rate is expected to depreciate in value to offset the interest rate differential, making the forward exchange rate higher (i.e., a premium) than the spot exchange rate.

Based on Interest Rate Parity, the Larger the Degree by Which