If interest rate parity exists, and the forward rate is an accurate estimator of the future spot rate, the foreign financing rate will be ____ the home financing rate.
A)lower than
B)greater than
C)similar to
D)none of the above

Question

Quizplus · Accepted Answer

Interest rate parity implies that the difference in interest rates between two countries should be reflected in the exchange rate. If the forward rate is an accurate estimator of the future spot rate, it suggests that the market expects interest rate parity to hold. Therefore, the foreign financing rate and home financing rate should be similar to each other.

If Interest Rate Parity Exists, and the Forward Rate Is