The larger the degree by which the foreign interest rate exceeds the home interest rate, the larger will be the forward discount of the foreign currency specified by the interest rate parity (IRP) formula.

Question

Quizplus · Accepted Answer

According to the interest rate parity formula, the forward discount of a foreign currency will increase as the foreign interest rate exceeds the home interest rate. Therefore, the larger the degree of difference between the two interest rates, the larger will be the forward discount of the foreign currency.

The Larger the Degree by Which the Foreign Interest Rate