If interest rate parity does not hold, and the forward ____ is ____ the interest rate differential, then foreign financing with a simultaneous hedge of that position in the forward market results in higher financing costs than those of domestic financing.
A) premium; higher than
B) discount; higher than
C) premium; less than
D) premium; higher than AND discount; higher than

Question

Quizplus · Accepted Answer

According to interest rate parity, the forward rate should be equal to the spot rate plus the interest rate differential between two countries. If interest rate parity does not hold and the forward rate is higher (premium) than the interest rate differential, then foreign financing with a simultaneous hedge of that position in the forward market results in higher financing costs than those of domestic financing.

If Interest Rate Parity Does Not Hold, and the Forward