If interest rate parity holds,the currency of the country with the relatively _______ interest rates will trade at a forward _______ to the country with the relatively high interest rate.
A) low; discount
B) low; premium
C) low; loss
D) none of the given choices

Question

Quizplus · Accepted Answer

According to interest rate parity, the currency of the country with the relatively high interest rates should trade at a forward premium to the country with the relatively low interest rate. This is because investors would demand a higher return to invest in the country with a lower interest rate, which would reduce demand for its currency and cause it to trade at a discount in the forward market. Therefore, the answer is B, indicating that the currency with the low interest rates will trade at a forward premium.

If Interest Rate Parity Holds,the Currency of the Country with the Relatively