Assume that interest rate parity holds. The Mexican interest rate is 50%, and the U.S. interest rate is 8%. Subsequently, the U.S. interest rate decreases to 7%. According to interest rate parity, the peso's forward ____ will ____.
A) premium; increase
B) discount; decrease
C) discount; increase
D) premium; decrease

Question

Quizplus · Accepted Answer

According to interest rate parity, the forward rate reflects the interest rate differential between two countries. A decrease in the U.S. interest rate reduces the differential, leading to a smaller discount on the peso's forward rate, thus increasing the discount.

Assume That Interest Rate Parity Holds