If a foreign country's interest rate is similar to the U.S. rate, the forward rate premium or discount will be ____, meaning that the forward rate and spot rate will provide ____ forecasts.
A) substantial; similar
B) substantial; very different
C) close to zero; similar
D) close to zero; very different

Question

Quizplus · Accepted Answer

If a foreign country's interest rate is similar to the U.S. rate, the forward rate premium or discount will be close to zero, meaning that the forward rate and spot rate will provide similar forecasts. This is because there is no significant difference in the interest rate between the two countries, and thus no need for a forward rate premium or discount to compensate for the interest rate differential.

If a Foreign Country's Interest Rate Is Similar to the U.S