As the expected future spot rate moves closer to the spot rate, uncovered interest parity indicates that:
A) interest rates should remain constant.
B) interest rates should converge.
C) interest rates should diverge.
D) The answer depends on whether the expected future spot rate is higher or lower than the spot rate.

Question

Quizplus · Accepted Answer

Uncovered interest parity suggests that if the expected future spot rate moves closer to the current spot rate, interest rates between two countries should converge. This is because the difference in interest rates is compensated by the expected change in exchange rates, leading to an equilibrium where no arbitrage opportunities exist due to interest rate differentials.

As the Expected Future Spot Rate Moves Closer to the Spot