If domestic returns are greater than foreign returns, then:
A) the spot rate is too high.
B) the spot rate is too low.
C) expectations of future exchange rates will change in the long run.
D) There is no opportunity for arbitrage.

Question

Quizplus · Accepted Answer

The spot rate is too high because domestic returns are greater than foreign returns, which means that it is more profitable to invest in domestic assets than foreign assets. This will cause demand for the domestic currency to increase, and the spot rate will rise.

If Domestic Returns Are Greater Than Foreign Returns, Then