If UIP holds and if the home currency is expected to depreciate, then:
A) the home interest rate must be greater than the foreign interest rate.
B) interest rates cannot be changing.
C) the home interest rate must be less than the foreign interest rate.
D) Not enough information is provided to answer the question.

Question

Quizplus · Accepted Answer

Under the Uncovered Interest Parity (UIP) condition, if the home currency is expected to depreciate, the home interest rate must be higher than the foreign interest rate to compensate for the expected loss in the home currency value. This encourages investors to hold domestic currency assets despite the expected depreciation.

If UIP Holds and If the Home Currency Is Expected