If interest rate parity exists, financing with a foreign currency may still be feasible, but it would have to be conducted on an uncovered basis (i.e., without use of a forward hedge).

Question

Quizplus · Accepted Answer

Interest rate parity suggests that the expected rate of return between two currencies should be equal when expressed in the same currency. If interest rate parity holds, it may still be feasible to finance with a foreign currency, but the financing would have to be conducted on an uncovered basis, meaning that no forward hedge is used. This is because a forward hedge would eliminate any potential profit arising from the interest rate differential between the two currencies.

If Interest Rate Parity Exists, Financing with a Foreign Currency