According to interest rate parity (IRP):
A) the forward rate differs from the spot rate by a sufficient amount to offset the inflation differential between two currencies.
B) the future spot rate differs from the current spot rate by a sufficient amount to offset the interest rate differential between two currencies.
C) the future spot rate differs from the current spot rate by a sufficient amount to offset the inflation differential between two currencies.
D) the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies.

Question

Quizplus · Accepted Answer

According to interest rate parity (IRP), the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies. This means that the forward exchange rate should reflect the difference in interest rates between the two currencies. If the interest rate differential between two currencies is expected to be 5%, then the forward rate should be adjusted accordingly to offset this differential, so that investors would receive similar returns regardless of which currency they invest in.

According to Interest Rate Parity (IRP)