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 suggests that the difference in interest rates between two countries should equal the expected change in their exchange rate. If the forward rate is an accurate estimator of the future spot rate, then the expected change in exchange rate is already reflected in the forward rate. Therefore, the foreign financing rate would be similar to the home financing rate.

If Interest Rate Parity Exists, and the Forward Rate Is