If UIP holds, the interest rate at home is 4%, and the exchange rate is expected to depreciate by 3%, then the foreign interest rate is:
A) 1%.
B) 3%.
C) 7%.
D) 12%.

Question

Quizplus · Accepted Answer

According to the Uncovered Interest Parity (UIP), the difference in interest rates between two countries is equal to the expected change in exchange rates. If the home interest rate is 4% and the exchange rate is expected to depreciate by 3%, the foreign interest rate must be 1% (4% - 3% = 1%).

If UIP Holds, the Interest Rate at Home Is 4