Which of the following appears to be a safe assumption when there is no difference between the forward and spot exchange rates between two currencies?
A) The countries have equal nominal interest rates.
B) The spot rate is expected to change.
C) Expected inflation is less than the nominal rate.
D) Both currencies are selling at a premium relative to the other.

Question

Quizplus · Accepted Answer

When there is no difference between the forward and spot exchange rates, it indicates that the market expects no change in exchange rates in the future. This can only happen if the countries have equal nominal interest rates, as interest rate differentials would typically result in a difference between the forward and spot rates. Therefore, it is a safe assumption that the countries have equal nominal interest rates.

Which of the Following Appears to Be a Safe Assumption