Which of the following is not true regarding interest rate parity (IRP)?
A) When interest rate parity holds, covered interest arbitrage is not possible.
B) When the interest rate in the foreign country is higher than that in the home country, the forward rate of that country's currency should exhibit a discount.
C) When the interest rate in the foreign country is lower than that in the home country, the forward rate of that country's currency should exhibit a premium.
D) When covered interest arbitrage is not feasible, interest rate parity must hold.
E) All of the above are true.

Question

Quizplus · Accepted Answer

It is not necessarily true that when covered interest arbitrage is not feasible, interest rate parity must hold. In fact, interest rate parity can sometimes be violated in the short term due to market inefficiencies or other factors. However, if covered interest arbitrage is not feasible, it suggests that markets are functioning efficiently and interest rate parity is likely to hold in the long run.

Which of the Following Is Not True Regarding Interest Rate