For this question,assume that interest parity holds,the future expected exchange rate is constant,the current nominal exchange rate is 1.2,the one-year foreign interest rate is 6% and the one-year domestic interest rate is 3%.Given this information,one can conclude that
A)financial market participants expect that the exchange rate (E)will increase by 3% over the coming year.
B)financial market participants expect that the exchange rate (E)will decrease by 3% over the coming year.
C)financial market participants expect that the domestic currency to depreciate by 3% over the coming year.
D)financial market participants expect that the exchange rate (E)will increase by 20% over the coming year.

Question

Quizplus · Accepted Answer

Interest parity holds when the expected change in the exchange rate is equal to the difference in interest rates between two countries. In this case, the expected change in the exchange rate is 3% (6% - 3%). Therefore, financial market participants expect that the exchange rate will increase by 3% over the coming year.

For This Question,assume That Interest Parity Holds,the Future Expected Exchange