If a foreign country's interest rate is similar to the U.S. rate, the forward rate premium or discount will be ____, meaning that the forward rate and spot rate will provide ____ forecasts.
A) substantial; similar
B) substantial; very different
C) close to zero; similar
D) close to zero; very different

Question

Quizplus · Accepted Answer

If the foreign country's interest rate is similar to the U.S. rate, there will be no incentive for investors to hold the foreign currency, resulting in a close to zero forward rate premium or discount. This suggests that the forward rate and spot rate will provide similar forecasts.

If a Foreign Country's Interest Rate Is Similar to the U.S