Which of the following statements is most valid?
A) The forward exchange rate is higher than the spot exchange rate if the foreign currency risk premium is positive.
B) The currency that pays a higher interest rate trades at a premium in the forward exchange market.
C) The currency that pays a higher interest rate trades at a discount in the forward exchange market.
D) Whether the forward exchange rate is higher than the spot depends on the relative volatilities of interest rates in the two currencies.

Question

Quizplus · Accepted Answer

The currency that pays a higher interest rate typically trades at a discount in the forward exchange market due to the interest rate parity principle, which states that the difference in interest rates between two countries is equal to the differential between the forward exchange rate and the spot exchange rate.

Which of the Following Statements Is Most Valid