If interest rate parity exists, the attempt to finance with a foreign currency while covering the position to avoid exchange rate risk will result in an effective financing rate that is ____ the domestic interest rate.
A)lower than
B)greater than
C)similar to
D)none of the above

Question

Quizplus · Accepted Answer

Interest rate parity suggests that the expected return on investment in a foreign currency should be equal to the return on investment in the domestic currency after accounting for exchange rate movements. Therefore, if interest rate parity exists, the effective financing rate in a foreign currency would be similar to the domestic interest rate.

If Interest Rate Parity Exists, the Attempt to Finance with a Foreign