Which of the following statements is false?
A) If interest rate parity holds, foreign financing and a simultaneous hedge of that position in the forward market will result in financing costs similar to those in domestic financing.
B) If interest rate parity holds, and the forward rate is an accurate forecast of the future spot rate, uncovered foreign financing will result in financing costs similar to those in domestic financing.
C) If interest rate parity holds, and the forward rate is expected to overestimate the future spot rate, uncovered foreign financing is expected to result in lower financing costs than those in domestic financing.
D) If interest rate parity holds, and the forward rate is expected to underestimate the future spot rate, uncovered foreign financing is expected to result in lower financing costs than those in domestic financing.

Question

​Which of the following statements is false?
A) ​If interest rate parity holds, foreign financing and a simultaneous hedge of that position in the forward market will result in financing costs similar to those in domestic financing.
B) ​If interest rate parity holds, and the forward rate is an accurate forecast of the future spot rate, uncovered foreign financing will result in financing costs similar to those in domestic financing.
C) ​If interest rate parity holds, and the forward rate is expected to overestimate the future spot rate, uncovered foreign financing is expected to result in lower financing costs than those in domestic financing.
D) ​If interest rate parity holds, and the forward rate is expected to underestimate the future spot rate, uncovered foreign financing is expected to result in lower financing costs than those in domestic financing.

Quizplus · Accepted Answer

If the forward rate underestimates the future spot rate, uncovered foreign financing would result in higher costs, not lower, compared to domestic financing.

​Which of the Following Statements Is False

Which of the Following Statements Is False