Assume that interest rate parity holds between the U.S. and Cyprus. The U.S. one-year interest rate is 7% and the Cyprus one-year interest rate is 6%. What is the approximate effective financing rate of a one-year loan denominated in Cyprus pounds assuming that the MNC covered its exposure by purchasing pounds one year forward?
A)6%.
B)7%.
C)1%.
D)cannot answer without more information

Question

Quizplus · Accepted Answer

When interest rate parity holds, the foreign financing cost (when covering with a forward hedge) is approximately equal to the domestic financing cost.

Assume That Interest Rate Parity Holds Between the U