The Interest Rate Parity Theorem should work because, when one sells a low interest rate currency to invest in a high interest rate currency and hedges the currency risk:
A) The cost of hedging is given by the forward points, which are equal to the interest rate differential between the two currencies
B) The high interest rate currency will depreciate
C) The profit from the appreciation of the high interest rate currency has been hedged away
D) Interest rates are mean reverting, which means the low interest rate will tend to rise and the high interest rate will tend to fall

Question

Quizplus · Accepted Answer

The cost of hedging is determined by the forward points, which should be equal to the interest rate differential between the two currencies according to the Interest Rate Parity Theorem.

The Interest Rate Parity Theorem Should Work Because, When One