The risk premium is the difference between foreign and domestic rates of interest under parity. This premium has three distinct parts. Which of the following is NOT a factor in the risk premium?
A) the currency premium
B) the country premium
C) the default risk premium
D) the floating risk premium

Question

Quizplus · Accepted Answer

The floating risk premium is not a factor in the risk premium. The three distinct parts of the risk premium include the currency premium (reflecting the expected change in exchange rates), the country premium (reflecting potential political and economic risks in the foreign country), and the default risk premium (reflecting the likelihood of default by the foreign borrower).

The Risk Premium Is the Difference Between Foreign and Domestic