Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the:
A) larger will be the forward discount of the foreign currency.
B) larger will be the forward premium of the foreign currency.
C) smaller will be the forward premium of the foreign currency.
D) smaller will be the forward discount of the foreign currency.

Question

Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the:​
A) ​larger will be the forward discount of the foreign currency.
B) ​larger will be the forward premium of the foreign currency.
C) ​smaller will be the forward premium of the foreign currency.
D) ​smaller will be the forward discount of the foreign currency.

Quizplus · Accepted Answer

Interest rate parity suggests that the currency of the country with a higher interest rate will trade at a forward discount in comparison to the currency of the country with a lower interest rate. This compensates for the higher interest earnings.

Based on Interest Rate Parity, the Larger the Degree by Which