If interest rate parity exists, transactions costs are zero, and the forward rate is an accurate predictor of the future spot rate, then the effective financing rate on a foreign currency:
A) would be equal to the UK interest rate.
B) would be less than the UK interest rate.
C) would be more than the UK financing rate.
D) would be less than the UK interest rate if the forward rate exhibited a discount and more than the UK interest rate of the forward rate exhibited a premium.

Question

Quizplus · Accepted Answer

If interest rate parity holds and there are no transaction costs, the effective financing rate on a foreign currency would equal the domestic interest rate (in this case, the UK interest rate) because the forward rate would offset any differences in interest rates between the two currencies.

If Interest Rate Parity Exists, Transactions Costs Are Zero, and the Forward